About this site

Thursday, September 15, 2011

National Photo Co. Making the News 1928"Photographing fire for newsreels; Washington, D.C., or vicinity"

Ilargi: Central banks promise to lend (hand out) more of your money to the banks, and the markets of course rise for a day since they smell a chance to get their hands on their share of it. Who pays?

If you still haven't figured out the difference between a liquidity crisis and a solvency crisis, we suggest you do so soon. Because the banks of this world are not illiquid, other than the worst of the Europeans having no access to US dollars. The banks are insolvent. The whole banking system is.

You can try and breathe that sigh of relief only if and when the first government decides to restructure both its own debt and that of its banks, if and when widespread defaults and bankruptcies are declared. Until that moment, you will be sinking ever deeper into the financial morass, whether you realize it or not, whether you want to hear it or not.

Defaults and bankruptcies too would be ugly, no question. But there is no proof that they would be worse than what awaits us now. And they have the huge advantage of bringing honesty and truth to the game. Both of which are indispensable for restoring trust and confidence, both in our economies and in our political systems.

Yeah, you're right, who am I kidding?

The flavor of the day, other than dollars for Athens, is still yuans for Rome. Rice AND Pizza. Ashvin takes a look at that mirage:

Ashvin Pandurangi:

Global Imperatives of a Chinese Exporter

Here are the two simple "equations" that all of the incessant rumor-inspired momentum chasers, equity bulls, peripheral EU bond bulls and relentless predictors of an imminent global Asia-backed bailout would do well to memorize:

After the Parliament of AAA-rated Austria rejected any near-term possibility of expanding the "European Financial Stabilization Facility", which requires unanimous consent of contributing members, the continued existence of Greece and the current EMU structure as an "ongoing operation" has come to rely solely on the good will of China.

Global equity markets are hanging by the skin of their knuckles on rumors that the Chinese are committed to assisting the EMU through its sovereign debt crisis and buying the toxic bonds of its debtor nations en masse. What these markets are soon to realize is that the Chinese government not only has its own domestic financial troubles to deal with, but is also not filled with brain-dead individuals who fail to understand the basics of global trade.

A truly significant bond purchase program by the Chinese would require them to re-allocate precious reserves into large EU member economies, such as Italy and Spain. These are economies that even other EU member states and their populations are both unable and unwilling to bail out.

Such a drastic action by the Chinese at this stage of the game would be the equivalent of an extremely "sophisticated" investor voluntary agreeing to be the last greatest fool in a speculative financial ponzi scheme that makes the U.S. sub-prime housing bubble look tame in comparison. Li Daokui, member of the Chinese central bank’s monetary policy committee, has a few choice words to say on this point, as quoted by Ambrose Evans-Pritchard for the Telegraph:

Professor Li said China must stop investing its hard-earned wealth in western debt and switch its incremental holdings into "physical assets", including the equities of major western companies.

"China is the most patient investor in the world. Imagine if our $3.2 trillion in foreign reserves had been controlled by George Soros: financial markets would be in much greater chaos," he said.

But such irrational investments are made all of the time in our twisted system of "free-market" incentives, right? Wrong. That argument may carry some weight on the way up before the ponzi has begun its process of implosion, but the Eurozone sovereign debt ponzi is well past that mark.

The Irish, Greek and Portuguese economies came under public financing pressure well over a year ago, and it has already been a few months since the "contagion" infected Italy and Spain. The Chinese have lost significant value on their purchases of Portuguese bonds and the volatile bond yields of Spain and Italy aren’t looking very appetizing for the once-bitten investor.

However, the relentless climb in Spanish and Italian yields over the summer indicates clear limits to Chinese buying. China's central bank has already suffered a large paper loss on Portuguese debt bought with much fanfare before that country needed a rescue. Italy's finance minister Giulio Tremonti said it is hard to persuade Asian investors to buy Italian debt when the European Central Bank hesitates to do so.

Now, some may still argue that it’s not 100% ridiculous to believe the Chinese have managed to convince themselves that an extremely risky intervention is needed to preserve the EMU and stabilize global financial markets, on which they heavily rely. Well, at least not until we factor in the fundamental equations of global trade in our current system that were presented above.

The only other reason the Chinese would be willing to go "all in" on the EMU is because it wants to preserve the economic health of its major export markets. There is little doubt that the Chinese economy does not have nearly enough internal consumer or investment demand to sustain moderate levels of economic growth, and therefore is utterly dependent on its export industries maintaining or increasing their market share in an era of rapidly contracting consumer economies.

So the only question is, how is this goal best accomplished from the perspective of the Chinese? By bailing out the entire Euro "periphery", or by letting nature take its course as some of the weak debtor nations are gradually pushed out of the Union by righteous members running a surplus and incredulous financial markets? The following graphs present the ECB's data on export/import value of the EU:

Value (1000s of Euros) of EMU (17) Exports to Other EU Members ECB Data

Both Chinese and EU exports have been steadily on the rise over the years running up to the global financial crisis, and have unsurprisingly managed to rebound on the back of unprecedented global intervention since then. The interesting thing is that the fastest growing export markets for both are nations within the EU and Europe itself. Now that the global depression has began to reassert itself with great force, the need to maintain export value and volume for both has become greater than ever.

While many analysts view this import/export relationship as a reflection of a healthy dynamic which encourages mutual aid, it is actually one that engenders aggressive, cutthroat competition. In this global system, and especially now, one does not gain market share by generously helping out the competition. The major competition, in this context, is Germany, France, the Netherlands and Switzerland.

We recently witnessed this dynamic when the Swiss became so concerned with an appreciating Swiss Franc and its consequences for a struggling export industry that its central bank decided it was willing to defy decades of history and undertake an unprecedented maneuver of pegging its currency to the Euro.

Essentially, it decided that suppressing the value of its currency, even in the short-term, was worth destroying its balance sheet and ruining its credibility as a central banking institution by promising unlimited currency intervention. From their perspective, this currency suppression provides a desperately needed boost to its export industry by lowering the price of exports and stabilizing the private CHF-denominated finances of Eastern European countries. What do the Chinese think of this bold move?

Although there was no clear public reaction by Chinese officials, we can be sure that they were not thrilled by the SNB stealing a patented move out of their playbook. The Chinese Yuan is pegged to a fixed exchange rate against the U.S. Dollar, and the U.S. Dollar (USD) floats against the Swiss Franc (CHF) and Euro. With the CHF now pegged to the Euro, the Chinese lose any export benefits gleaned from appreciation of the CHF as a safe haven relative to the Euro and USD.

That has only added insult to a much deeper injury, as they have also had to deal with a Euro currency which has repeatedly come under downward pressure for the past year. This pressure obviously benefits the non-euro European export market share of German, French, Italian, Spanish and Dutch industries, as well as their extra-European market share.

And, as if all of that wasn’t enough, the EU exporters have benefitted greatly at the expense of China by failing to recognize it as a "market economy" under the definitions of the World Trade Organization. This failure of recognition has been used as an economically, politically and legally leveraged asset for Western exporters, since it effectively increases the exposure of Chinese industries to threatened or actual legal actions brought to the WTO and sanctions for violating "anti-dumping regulations".

These are regulations prohibiting WTO members from "dumping" their goods on other countries by "unfairly" lowering prices through government subsidies to private industry (usually via below market-rate loans) or other state-sponsored measures (i.e. "artificial" currency devaluation). Never mind that Western "market economies" engage in this activity all of the time.

Market status under the WTO has become the Holy Grail for China, both because it makes the country less vulnerable to 'anti-dumping' sanctions from the EU and because it marks the country's final coming of age in the global economy.

Beijing is bitter that the EU recognises the market status of Russia despite open violations of WTO rules by the Kremlin, claiming that the "double standard" is a disguised form of protectionism.

Under its WTO accession accord in 2001, China remains a "non-market economy" for 15 years unless other members agree to fast-track the process. There could still be problems even after 2016 if major powers take a tough line.

The very mention of this "request" as a part of the numerous conditions to a Chinese bailout is essentially a big, fat NO to any such possibility. There is a reason why China has been the number one target of AD lawsuits, and that reason only becomes stronger in an environment of global economic contraction and universally struggling exporters.

The WTO has been one of the fundamental mechanisms through which developed countries manage trade flows to their favor under the guise of promoting economic efficiencies through "free trade". Now, major exporters must do everything they can to retain their share of a dwindling pie, and the WTO is still one of the most coercive means for the West to do so. An example of this dynamic from Wikipedia:

The consequences of not being granted market economy status have a big impact on the investigation. For example, if China is accused of dumping widgets, the basic approach is to consider the price of widgets in China against the price of Chinese widgets in Europe. But China does not have market economy status, so Chinese domestic prices cannot be used as the reference.

Instead, the DG Trade must decide upon an analogue market: a market which does have market economy status, and which is similar enough to China. Brazil and Mexico have been used, but the USA is a popular analogue market. In this case, the price of widgets in the USA is regarded as the substitute for the price of widgets in China.

This process of choosing an analogue market is subject to the influence of the complainant, which has led to some criticism that it is an inherent bias in the process.

Chinese elites know that any firm commitment they make to purchasing bonds of EU debtor nations will not stabilize their public finances long-term, and, in addition, will not even make the Euro appreciate considerably against the USD or other established reserve currencies. They also know that Northern Europe will never agree to "fast-track" the WTO process, because, at this precarious time for exporters, that may cost them even more than the price tag on preventing EMU collapse.

China’s bailout would merely serve to preserve the present situation, in which the Euro officially survives, but as a freak of nature that may be devalued at any time with nothing more than an unpleasant rumor, and major exporting nations continue to pursue considerable monetary interventions which the Chinese simply cannot afford to match due to their already under-stated rate of domestic inflation. From their perspective, the only "legitimate" option is to let the EMU splinter.

Regardless of whether the Euro is retained by core member countries of the EU or, in a more extreme situation, the core countries withdraw and re-instate their own national currencies, Chinese export market share is bound to increase relative to some of their largest and, therefore, most troublesome competitors. There is no doubt that the Chinese are worried about the financial contagion effects from a peripheral default, such as the increasingly imminent default of Greece, but so is everyone else in the world and there is very little anyone can do about it.

At this point, it is merely a foregone conclusion and countries (and central banks) must try to prepare their best for it, by insulating their own financial systems to any extent possible. Chinese Premier Wen Jiabao implied as much in a few words to the World Economic Forum, which the markets seemed to have completely missed. The Telegraph's Ambrose Evans-Pritchard once again:

Chinese premier Wen Jiabao was soothingly polite in his speech to the World Economic Forum in Dalian, insisting that his country will play its part to "prevent the further spread of the sovereign debt crisis".

The language toughened a few notches when asked later how far China's Communist Party is really willing to go. The message was clipped and severe. Beijing will not sign a blank cheque for European states that have failed to carry out deep reform. "Countries must first put their own houses in order," he said.

But that’s the entire problem; they can’t put their own houses in order, and everyone, including Premier Jiabao, knows it. Besides, the Chinese are much more concerned with the health of the USD and Treasury markets than those of the EMU periphery, and capital flight from a splintered EMU will significantly boost those markets.

For all of China's talk about becoming a powerhouse consumer economy, domestic companies moving abroad, investing in foreign companies, or its currency contending for the role of global reserve, we must remember that it is still by and large an export economy according to the dictates of the global market system of trade.

The Chinese are under no illusion that anything has changed in the last few years for their economic model, and that means they must remain "competitive" until the bittersweet end. In this system, you don't stay competitive by bailing out the competition.

Societe Generale's Albert Edwards points us to a terrifying technical sell signal in the S&P 500: the "killer wave." This formation was identified by Investors Chronicle's Dominic Picarda.

Here's how it works. The Coppock indicator--an esoteric momentum measure (Wikipedia description) --turns down giving a sell signal. This happened last summer. Before the indicator dips below 0, it moves up again, which it did in April of this year. The "killer wave" formation is completed when the Coppock indicator turns again. And what happens next is real ugly.

Picarda has observed eight "killer waves" in the the S&P 500 in the last 83 years. On average, the S&P 500 sinks 40% over 20 months.

The idea that the economy has grown at roughly 5% since 1980 is a lie. In reality the economic growth of the U.S. has been declining rapidly over the past 30 years supported only by a massive push into deficit spending.

From 1950-1980 the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There were a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily in production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

As we have discussed previously in "The Breaking Point" and "The End Of Keynesian Economics", beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier effect, is partially responsible for this transformation. The decline in economic output was further exacerbated by increased productivity through technological advances, which while advancing our society, plagued the economy with steadily decreasing wages. Unlike the steadily growing economic environment prior to 1980; the post 1980 economy has experienced by a steady decline. Therefore, a statement that the economy has been growing at 5% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.

This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living. As their wages declined they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007 the household debt outstanding had surged to 140% of GDP. It was only a function of time until the collapse in house built of credit cards occurred.

This is why the economic prosperity of the last 30 years has been a fantasy. While America on the surface was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and lower personal savings was eating away at core.

The massive indulgence in debt, what the Austrians refer to as a "credit induced boom", has now reached its inevitable conclusion. The unsustainable credit-sourced boom, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread mal-investments. Not surprisingly, we clearly saw it play out "real-time" in everything from subprime mortgages to derivative instruments which was only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.

When credit creation can no longer be sustained the markets must began to clear the excesses before the cycle can begin again. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.

The clearing process is going to be very substantial. The economy is currently requiring roughly $4 of total credit market debt to create $1 of economic growth. A reversion to a structurally manageable level of debt would involve a nearly $30 Trillion reduction of total credit market debt. The economic drag from such a reduction will be dramatic while the clearing process occurs.

This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will witness an economy plagued by more frequent recessionary spats, lower equity market returns and a stagflationary environment as wages remain suppressed while costs of living rise. However, only by clearing the excess can the personal savings return to levels which can promote productive investment, production and ultimately consumption.

The end game of three decades of excess is upon us and we can't deny the weight of the balance sheet recession that is currently in play. As we have stated in the past - the medicine that the current administration is prescribing to the patient is a treatment for the common cold; in this case a normal business cycle recession. The problem is that this patient is suffering from a cancer of debt and until we begin the proper treatment the patient will continue to wither.

The government this week reported the U.S. poverty rate has risen to 15.1%, the highest since 1993, while 22% of children are living below the poverty line. Meanwhile, average median U.S. income fell 2.3% to $49,445, roughly 7% below the 1999 peak and a level not seen since 1996 on an inflation-adjusted basis.

If you think that's bad, just listen to what trend watcher Gerald Celente has to say in the accompanying video. "Things are going to get much worse," Celente says. "Society is breaking down on every level: socially, economically, politically and it's not just the U.S. It's worldwide."

Celente believes the globe is following a similar path to what occurred after the 1929 crash: Severe economic contraction, followed by currency wars, trade wars and, ultimately, armed conflict. Currency wars have already started he said, citing the recent decision by the Swiss National Bank to peg the Swiss franc to the euro. "Trade wars are next and then real wars, unfortunately," Celente predicts.

Unlike the 1930s and 1940s, The Trends Journal publisher believes major nations will avoid direct conflict "because they can annihilate each other." The bad news is he expects more asymmetrical warfare, including the use of weapons of mass destruction such as bio-terrorism and "suitcase nukes."

Power to the PeopleLest you believe Celente, who has been making similar forecasts for some time, is entirely negative, he does believe there's a solution: Direct democracy. "If we can bank online we can vote online," he quips, suggesting we follow the Swiss (or Californian) model of letting citizens vote on "major" decisions, such as war, health-care policy, education and the like.

"We don't have a representative form of government," Celente continues. "This is not a democracy. The only people these cats represent are the people that give 'em a lot of dough."

As discussed in a prior segment, Celente considers himself a political agnostic and doesn't see much (or any) difference between the two major parties. "It's a two-headed, one party system," he says. "We have a bunch of losers in Washington. How can any adult believe these guys after the summer spectacle of debt ceiling baloney?"

The euro surged higher against the dollar on Thursday after global central banks joined forces to provide dollar liquidity to the market, a move that could ease funding pressure on European banks. The European Central Bank said it would lend eurozone banks dollars in three separate three-month loans to ensure they had sufficient funding until the end of the year.

"The Governing Council of the European Central Bank has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said in a statement.

Divyang Shah at IFR Markets said the announcement would come as a welcome relief to markets concerned about European banks access to dollar funding. "The co-ordination from the ECB, Fed, SNB, BoJ and BoE will likely raise the prospect that we are in a period where further policy announcements will be made to deal with more than just the symptoms of the eurozone sovereign debt and financial crisis and actually start to take measures to get Greece back online and dispel default rumours and inject capital directly into selective banks or even across the board in order to reduce concerns over being stigmatised," he said.

The euro rose 1.3 per cent to $1.3914 against the dollar. The euro was already in demand after Germany and France reassured investors that Greece would remain in the eurozone.

Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, put out a statement late on Wednesday stressing their conviction that Greece’s future lay in the eurozone after a conference call with George Papandreou, Greek prime minister. This lessened fears that Greece would default on its debts and raised hopes that Athens would receive fresh rescue funding from the International Monetary Fund and its European partners.

The euro also rose 1.4 per cent to Y106.93 against the yen and climbed 0.8 per cent to £0.8787 against the pound. Meanwhile, the dollar suffered, falling 0.5 per cent to $1.5846 against the pound, dropping 1.3 per cent to SFr0.8657 against the Swiss franc and losing 0.7 per cent to $1.0330 against the Australian dollar.

The euro also rose 0.2 per cent to SFr1.2066 against the Swiss franc as the Swiss National Bank reaffirmed its commitment to temper the strength in its currency after imposing a SFr1.20 ceiling against the euro last week. The SNB said it would defend the SFr1.20 level with the "utmost determination" and was prepared to buy foreign currency in "unlimited quantities".

The bank added that it was taking a stand against the acute threat to the Swiss economy and the risk of deflationary developments that sprang from the "massive overvaluation" of the Swiss franc. "Even at a rate of SFr1.20, the Swiss franc is still high and should continue to weaken over time," the central bank said. "If the economic outlook and deflation risks so require, the SNB will take further measures."

Calvin Tse at Morgan Stanley said the statement revealed that the SNB was prepared to act further and was likely to set a lower ceiling in the exchange rate of the Swiss franc against the euro in the coming months. "In our mind, if the market does not move the euro higher against the Swiss franc, the SNB is prepared to," he said. "Currently, there is no risk of inflation in Switzerland but as the SNB notes, there are downside risks to price stability should the franc not weaken further."

The recent gyrations in global stock markets are just the beginning, says U.S.-based economist and author Harry Dent, who believes the Dow will fall below 10,000 in the near term before crashing to around 3,000 in 2013.

"I think the stock crash started in late April. This is just the first wave down...I think the crash really starts some time in early 2012," said the Founder and CEO of economic research company HS Dent and author of upcoming book "The Great Crash Ahead". He pointed to the selloff during the last global financial crisis, when the Dow lost around 8,000 points in the period between October 2007 and early 2009.

Dent based his bearish predictions squarely on the changing spending habits of global consumers. "Baby boomers around the world, and all the developed countries — Europe, North America, Australia — they have peaked in their spending cycles...they've been driving up real estates prices and stock prices and the economy for decades, and now they're going to be saving and not borrowing," Dent said.

Accentuating the problem is the deleveraging of U.S. private debt, which has doubled to $42 trillion from $20 trillion in the last eight years, according to Dent, and is now valued at three times the size of the nation’s public debt.

"That debt is deleveraging, and that's actually causing deflationary trends. It won't matter how much stimulus the government throws at the system, because baby boomers with their already huge debt burdens will not want to borrow money and spend more," said Dent. "In the Great Depression, that's what happened — deflation came in such a deep downturn because so much debt was deleveraging."

According to Dent, the spending in the boom years has led to the biggest global real estate and credit bubble in history. He believes the worst hit will be those places where the bubble hasn't burst yet — West Canada, Australia and China.

"Bubbles go back to where they started," he noted. U.S. housing prices, he observed, have fallen 34 percent since their peak, and will drop by another 30 percent. "There's a lot more pain coming, especially in real estate," said Dent, who sold his home in Miami, Florida in October 2005, and doesn’t intend to buy property until the market bottoms in a few years.

The only solution to the crisis, Dent offers, is for policy-makers to intervene and write down debt. "You can't deal with this crisis without dealing with the debt first because the demographics are not in your favor. So it's the only thing you can do, by writing down debt, you free up cash flow for consumers and businesses. It's the only thing you can do in a crisis like this after such a major debt and credit bubble."

Avoid Gold, Silver; Buy DollarsContrary to what most analysts are recommending, Dent advises staying cautious on gold and silver, and stocking up on U.S. dollars. "I think gold and silver are a bubble. It's the most dangerous place to be," Dent said. "Gold's kind of a wild card, but what we notice it's gone parabolic. We've been telling people… to get out of gold at $2,000." He thinks silver has peaked at $50. "The last time silver went to $50, it crashed back to $4 within two years."

As the deleveraging process takes place and most asset classes fall, Dent says the one asset that will return to its safe haven status will be the greenback, "Debts get written off. That destroys dollars. It makes the dollars more scarce. It restores its value."

Three years ago today, my best friend called me and told me to turn on my television. I remember the way he described it– "Lehman is finished." The TV showed guys packing up their desks on Sunday afternoon, moving out of their offices forever.

That was the precipice from which financial markets plunged the following day, taking the global economy along for the next three years.

We appear to be at that moment once more.

Greece is out of cash. Again. The Greek Deputy Finance Minister said on Monday that his country only has enough cash to operate for a few more weeks. As I write this note, French, German, and Greek politicians are all on a conference call, feverishly trying to figure out a way to avoid default. Everyone seems to understand the consequences at stake… given the chain of derivatives out there, a Greek default will completely dwarf the Lehman collapse.

Unfortunately for the bureaucrats, dissent against the Greek bailout plan is spreading across Europe… and leaders can no longer ignore the growing wave of opposition in Finland, the Netherlands, Austria, and Germany. It’s no wonder, when you think about it. Why should a German hairdresser who retires at age 65 stick his neck out so that a Greek hairdresser can retire at age 50? This, from a continent that was perpetually at war with itself for over a thousand years.

Europe’s great benefactor over the last several months has been China, whose treasury has been buying up worthless European sovereign debt to ensure that Greece doesn’t default. It’s a testament to the absurdity of our failed financial system when the highly indebted rich countries of the world have to go to China, a nation of peasants, for a bailout.

Speaking at the World Economic Forum this morning, Chinese premier Wen Jiabao delivered a stern message: there is a limit to Chinese generosity, and it will come at a price. The Chinese will undoubtedly use any further investment in European bonds as leverage to influence western politicians. They already bought Tim Geithner. The US government refuses to label China a ‘currency manipulator’. Similarly, European politicians will now be forced to acknowledge China as a ‘market economy’.

Ultimately, this charade will fail. It’s a simple matter of arithmetic. China could buy every single penny of Greek debt and it still wouldn’t solve the underlying problem: Greece would still be in debt! And more, still hemorrhaging billions of euros each month. Throwing more money at the problem only makes it worse.

Then there are those Greek assets for sale… like state-owned Hellenic Railways Group. It lost a cool billion euros last year. Or the notoriously inefficient, highly unionized, traditionally lossmaking Greek postal service, Hellenic Post. Any takers? These are not exactly high quality assets… nor can Greece expect to get top dollar in what’s clearly a distress sale.

Over 200 years ago, Napoleon was forced to sell France’s claim to 828,000 square miles of land in the New World in order to cover his war expenses. US President Thomas Jefferson happily obliged, paying the modern equivalent of around $315 million (based on the gold price), roughly 59 cents per acre in today’s money. According to US census records, there were around 90,000 people living within the territory during that time who literally woke up the next day to a different world. This is the sort of thing that happens when governments go bankrupt.

With the Lehman collapse, a lot of people got hurt… but it was mostly a financial and economic issue. When an entire nation goes bust, the pain is felt much deeper: the most basic systems and institutions that people have come to depend on simply disappear.

Argentina’s millennial debt crisis is a great example of this… suddenly the power failed, the police stopped working, the gas stations closed, the grocery stores ran out of food, the retirement checks stopped coming, and the banks went under (taking people’s life savings with them).

European leaders (with Chinese help) can postpone the endgame for a short time, but they’re really just taking an umbrella into a hurricane. It would be foolish to not expect a Greek default, and it would be even more foolish to not expect significant consequences. The only question is– how are you prepared to deal with what happens?

Americans’ pessimism about the economy has deepened and confidence in both political parties has fallen with only 20 percent saying the country is on the right course even as they remain divided over solutions.

Just 9 percent of people say they are confident the economy won’t slide back into recession, in a Bloomberg National Poll. A majority says it will take at least six more years for home values in their community to recover to pre-recession levels. "This country is going downhill," says Glenn Davis, 53, a political independent and a factory worker from Lafayette, Indiana. "For regular people like me, it’s hard to get ahead."

Americans are sending mixed signals on the path forward, according to the poll, conducted Sept. 9-12 by Selzer & Co. of Des Moines, Iowa. While they embrace the need for tough prescriptions to cut the federal deficit, including scaling back entitlement programs such as Social Security and increasing taxes on the wealthy, they balk at many specific spending cuts.

Still, the public is re-examining opposition to once- politically explosive ideas such as eliminating the home mortgage interest deduction in the income tax code and raising the Social Security retirement age. Pluralities now support both after a resounding rejection only nine months ago.

The broad message of Republicans is resonating, with 57 percent of the country saying the best way to create jobs is to cut taxes and government spending. That hasn’t stopped the party’s brand from deteriorating, and the public rejects many specific Republican policy prescriptions.

Declining Repeal AppealSupport for one of the party’s central tenets is declining, with just 34 percent of the country now favoring repeal of President Barack Obama’s health-care overhaul, down from 41 percent six months ago. Republicans support repeal, while political independents and Democrats don’t.

A 51 percent majority says a special congressional committee considering how to reduce the federal deficit by $1.5 trillion should opt to raise taxes on higher-income earners before curbing entitlements such as Medicare or Social Security, rejecting Republican pledges against tax increases. Almost six of 10 say the panel must do one or the other to meet its deficit-cutting goal.

"Taxes are at the heart of the controversy because Americans hold two conflicting views," said J. Ann Selzer, president of Selzer & Co. "In the abstract, they’d rather cut than raise taxes. But in the context of near-term goals to cut the deficit, they prefer raising taxes to cutting entitlements."

Losing PatienceThe poll results show the public is running out of patience with political leaders after months of protracted negotiations over the national debt ceiling that brought the country to the brink of default and signs that the economy is weakening. Seventy-two percent say the country is on the wrong track.

Both sides have suffered. A 53 percent majority holds a negative view of the Republican Party, up from 47 percent in June. The Democratic Party has also taken a hit, with a 46 percent to 44 percent plurality of respondents saying they have an unfavorable view of the party, a reversal from a plurality of 48 percent to 42 percent with a positive view three months ago.

"Both sides need to think outside the box," says Rachel Reichard, 40, a political independent and full-time home- schooling mother from Hagerstown, Maryland. "It just seems like everybody is thinking like they did in the Clinton administration. They still had typewriters on the desk and landlines back then."

No Better OffOnly 27 percent of Americans say they are better off now than in January 2009, when Obama took office in the depths of the recession compounded by the September 2008 financial crisis and the country was losing as many as 820,000 jobs a month. That’s a decline from June, when 34 percent said they were better off.

Unemployment and jobs are the nation’s top concern, cited by 46 percent of Americans, ranking ahead of the combination of the deficit and government spending at 30 percent. Among Republicans, the combination of the deficit and spending was the most important issue, cited by 47 percent, ranking ahead of jobs at 36 percent.

Concern over the economy has increased as growth weakened during the first half of the year to its slowest pace since the recovery began, and market pessimism has risen over the European debt crisis. In August, U.S. employers added no new net jobs, the worst monthly results for payroll growth since September 2010.

Income DropsUnemployment has been hovering at or above 9 percent for more than two years and real average hourly wages for those who have jobs declined 1.3 percent over the 12 months through July. Even with 3 percent growth in the economy last year, real median income for U.S. households dropped in 2010 to the lowest level since 1996, according to a census report issued yesterday.

The benchmark Standard & Poor’s 500 Index has declined 12.8 percent since July 22 and was down 6.74 percent for the year at the market close in New York yesterday. After months of political debate dominated by struggles over the national debt and deficit, Obama’s advantage over Republicans on who has the better vision for the economy has now largely eroded.

Poll respondents still favor the president’s long-term view by 43 percent to 41 percent for Republicans, though that has slipped from a 12-point advantage for Obama in March. Political independents now divide almost evenly: 38 percent for Obama and 39 percent for Republicans.

The public’s view of Federal Reserve Chairman Ben S. Bernanke is also less favorable than in the last poll. Twenty- nine percent said they have a favorable view of the central banker against 35 percent who have an unfavorable view. That compares with the June poll, when 30 percent had a favorable view, and 26 percent had an unfavorable view.

Rejecting Republican PlansMajorities reject many specifics of Republicans’ long-term plan to balance the budget. More than three-quarters oppose cuts to Medicaid, the federal-state health-insurance program for the poor, and almost 6 of 10 reject replacing the Medicare plan for the elderly with a private voucher system. A 54 percent majority would raise taxes on families earning more than $250,000 per year, a measure that Republican leaders oppose.

Public support is rising for some budget measures that much of the country once considered untenable. Americans are now evenly divided on gradually raising the Social Security retirement age to 69, with 49 percent in favor and 48 percent opposed. Last December, the idea was opposed 60 percent to 37 percent.

Viable Option"It’s a viable option," said Chris Nicholson, 44, a political independent and a software architect in Oakland, Tennessee. "People live longer. My mother’s 65 and there’s no reason for her not to work. As a matter of fact, she’d be working now if she could find a job."

Support for a higher retirement age is strongest among the elderly, whose benefits wouldn’t be affected. Still, middle-aged and younger Americans have softened their opposition. Fifty-two percent of those under 55 are now against an increase in the retirement age versus almost two-thirds in December.

A tax revamp that eliminates all deductions, including that for home mortgage interest payments, in exchange for lower rates is backed by 48 percent and opposed by 45 percent. In December, 51 percent were against the proposal compared with 41 percent in favor. Republicans favor the idea 54 percent to 38 percent. In December, they opposed it 51 percent to 41 percent. The poll, which questioned 997 U.S. adults ages 18 or older, has a margin of error of plus or minus 3.1 percentage points.

As the Federal Reserve weighs yet again how to try and stimulate the economy, one option seems like a no-brainer: stop paying interest on about $1.6 trillion in excess reserves that banks keep with the Fed. The idea is that if banks stop receiving 0.25 percentage point on the reserves, they will lend more. After all, the alternative is getting even-more paltry returns on things like short-term Treasury securities.

Trouble is, when it comes to this, or any of the unconventional options the Fed is considering, nothing is as easy or straightforward as it looks. Halting the payment of interest on excess reserves might actually disrupt markets.

The Fed started paying interest on excess reserves—those that exceed the funds banks must hold with the Fed against deposits—during the financial crisis as a way to offset the expansion of its own balance sheet. This was meant to discourage excessive credit creation and help prevent an inflationary spiral. It also allowed for flexibility. As New York Fed President William Dudley said in a speech in July 2009, the Fed could raise the rate to prevent inflation, but could also reduce it "if the demand for credit is insufficient to push the economy to full employment."

But it's more complicated today due to the shaky economy and super-low interest rates. For starters, such a move probably won't do much economic good. Banks aren't likely to suddenly start lending just because they stop getting a measly 0.25 percentage point on excess reserves. They would already be lending if greater loan demand existed.

Plus, a large share of the excess reserves are from foreign banks. And if the Fed interest rate went to zero, banks might end up shifting excess reserves into other assets such as short-term Treasurys or repurchase, or repo, instruments, even though they offer historically low rates.

This could push yields even lower, increasing the risk they dip into negative territory when there are further bouts of extreme market stress. That could disrupt money market funds, leaving them the choice of subsidizing depositors or running the risk of seeing net asset values fall below $1, known as breaking the buck, Joseph Abate of Barclays Capital noted in a recent report.

The possibility that the Fed may unsettle, rather than soothe, markets is also true for some of the other options it is considering. Chief among these is a shift, or "twist", of its Treasury securities portfolio in favor of longer-dated government debt. One fear is that the Fed may actively sell shorter-dated government paper, rather than letting it mature, to fund purchases of longer-dated debt.

This could cause short-term yields to rise, thereby making short-term debt a more-attractive place for investors to huddle. If so, this would run counter to the aim of buying longer debt, which is to push investors into riskier assets. Given the risk of unintended consequences, the Fed needs to be clear that any moves it takes will really benefit the economy. It shouldn't just do something for the sake of appearing to act.

Banks have stepped up their actions against homeowners who have fallen behind on their mortgage payments, setting the stage for a fresh wave of foreclosures. The number of U.S. homes that received an initial default notice -- the first step in the foreclosure process -- jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday.

The increase represents a nine-month high and the biggest monthly gain in four years. The spike signals banks are starting to take swifter action against homeowners, nearly a year after processing issues led to a sharp slowdown in foreclosures. "This is really the first time we've seen a significant increase in the number of new foreclosure actions," said Rick Sharga, a senior vice president at RealtyTrac. "It's still possible this is a blip, but I think it's much more likely we're seeing the beginning of a trend here."

Foreclosure activity began to slow last fall after problems surfaced with the way many lenders were handling foreclosure paperwork, namely shoddy mortgage paperwork comprising several shortcuts known collectively as robo-signing. Many of the nation's largest banks reacted by temporarily ceasing all foreclosures, re-filing previously filed foreclosure cases and revisiting pending cases to prevent errors.

Other factors have also worked to stall the pace of new foreclosures this year. The process has been held up by court delays in states where judges play a role in the foreclosure process, a possible settlement of government probes into the industry's mortgage-lending practices, and lenders' reluctance to take back properties amid slowing home sales. A pickup in foreclosure activity also means a potentially faster turnaround for the U.S. housing market. Experts say a revival isn't likely to occur as long as there remains a glut of potential foreclosures hovering over the market.

Foreclosures weigh down home values and create uncertainty among would-be homebuyers who fret over prospects that prices may further decline as more foreclosures hit the market. There are about 3.7 million more homes in some stage of foreclosure now than there would be in a normal housing market, according to Citi analyst Josh Levin. "This bloated foreclosure pipeline now presents the greatest obstacle to a housing market recovery," Levin said in a client note this week.

Banks have been working through a backlog of properties that first entered the foreclosure process months, if not years ago. But the August increase in homes entering that process sets the stage for a host of new properties being targeted for foreclosure. That's bad news for homeowners who may have grown accustomed to missing payments for several months without the threat of foreclosure bearing down on them. In states such as New York and Florida, for instance, processing delays have helped some homeowners stay in their homes for more than two years before banks got around to taking back their properties.

In all, 78,880 properties received a default notice in August. Despite the sharp increase from July, last month's total was still down 18 percent versus August last year and 44 percent below the peak set in April 2009, RealtyTrac said.

Some states, however, saw a much larger increase. California saw a 55 percent increase in homes receiving a default notice last month, while in Indiana they climbed 46 percent. In New Jersey, where last month a judged ruled that four major banks could resume uncontested foreclosure actions in the state under court monitoring, homes receiving a default notice increased 42 percent. Despite the increase in new defaults, the number of homes scheduled for auction and those repossessed by banks slowed in August.

Scheduled foreclosure auctions declined 1 percent from July and fell 43 percent from a year earlier, RealtyTrac said. Auctions increased from July levels in several states, including Colorado, where they rose 51 percent, and Arizona, where they grew 20 percent.

Lenders repossessed 64,813 properties last month, a drop of 4 percent from July and down 32 percent from a year earlier. Home repossessions peaked September last year at 102,134. Banks are now on track to repossess some 800,000 homes this year, down from more than 1 million last year, Sharga said. The firm had originally anticipated some 1.2 million homes would be repossessed by lenders this year.

In all, 228,098 U.S. homes received a foreclosure-related notice last month, a 7 percent increase from July, but a nearly 33 percent decline from August last year. That translates to one in every 570 U.S. households, said RealtyTrac. Nevada still leads the nation, with one in every 118 households receiving a foreclosure-related notice last month. Rounding out the top 10 states with the highest foreclosure rate in August are California, Arizona, Georgia, Idaho, Michigan, Florida, Illinois, Colorado and Utah.

You might think President Obama has enough on his plate without worrying about the European crisis. But you'd be wrong.

The White House may not really care too much about the fate of the euro itself, but it does care about European banks and the sense of impending economic doom. Any blowback - a Lehman Brothers in reverse - could send the fragile to non-existent US recovery spinning right off course. So President Obama and his treasury secretary have rolled their sleeves up, and got stuck in to the most inflammatory debate in Europe.

Should the crisis mean more Europe, or less? "It is difficult to co-ordinate and agree on a common path when you have so many countries with different policies and economic situations," Mr Obama told a number of Spanish-speaking journalists. That is a truism in Europe to anybody who has dealt with, observed or covered the multi-headed EU beast.

The relationship between the governments of 27 countries, the European Commission and the European Parliament is less fractious than the relationship between Congress and the president. But even America's tortuously slow decision-making process looks like lightning by comparison. There are very good reasons for this. But the president suggested a way has to be found around it.

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to co-ordinate monetary integration with more effective co-ordinated fiscal policy," Mr Obama said.

The Obama administration has felt for a while that European leaders have used sticking plasters instead of drastic surgery, that they come up with bland statements to half-soothe the markets and head off a crisis for a few weeks at a time, only for it to be back the following month. Now they've gone public because private frustration has turned to genuine alarm.

The message that there has to be bold, dramatic action will be delivered in person by none other than US Treasury Secretary Timothy Geithner. He is making an unprecedented trip to join European finance ministers in Poland.

Mr Geithner's analysis will be unprecedented as well in its bluntness. He says Europe has been behind the curve, and has to show that its leaders have finally got the message. "They're going to have to demonstrate to the world they have enough political will. This is not a question of financial or economic capacity," Mr Geithner said. "Even if you take a very conservative, pessimistic estimate of the ultimate cost of resolving this crisis for Europe, it is completely within the capacity of the stronger members of the euro area to absorb those costs."

What is interesting here is that US leaders are missing the ideological nuance, and making - what to them - are pragmatic arguments. They don't really care about the plight of European leaders at the mercy of an economic crisis that demands one thing: great integration - but could prompt a political crisis demanding the exact opposite: a looser Europe. However, because Americans are unconcerned about the ideological nuances of the debate, perhaps they see things a lot more clearly.

Wall Street has much the same view as the White House. It is the crisis that worries them, not the fate of the euro itself, or the exact mechanisms taken to solve it. David Zervos from Jefferies Global Securities says many Americans regard the Euro with distaste.

"The structure of economic and monetary union has been left half-built," Mr Zervos told me. "We are in the middle of one of the worst recessions that any of us have ever lived through, and the euro structure was not built for that sort of turmoil. "Fiscal union, the ability to pull resources fiscally across countries, was not built into the structure and right now we are seeing that problem tear the system apart and it's a pretty messy situation."

He points out that the US went though a debate about federalism 200 years ago, while Europe has had a federal currency for just over 10 years, but seems unenthusiastic to have the same debate.

Behind the intimidating talk of "fiscal integration", what do the Americans mean? They would like Euro bonds, certainly, but may have accepted that is not going to happen. So they would like stronger action by the European Central Bank, with the will of the Fed to act quickly and strongly. They want European politicians to put their people's money where the elites' mouths have been for a long while.

At first blush, it is faintly amusing that this harsh, practical advice is coming from the USA. Here, political pragmatism often goes by the board as every idea gets tested against philosophic first principles.

America's leaders seem to ignore the problem at the heart of this debate: to survive, the euro may need a spirit of European solidarity that simply doesn't seem to exist. But then if the idea of the Euro had been destruction-tested, American-style, against political first principles, Europe's leaders might not be in need of a lecture from the president.

A key rate setter-for China's central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible. "The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way." "Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France and the hard core.

We don't know how much US debt is held by SAFE (State Administration of Foreign Exchange), the bank's FX arm. The figure is thought to be over $2.2 trillion. The Chinese are clearly vexed with Washington, viewing the Fed's QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.

Mr Li, one of three outside academics on China's MPC, described the debt deals on Capitol Hill as "just trying to by time", saying it will not be enough to stop America's "debt dynamic" turning dangerous.Fair enough, but let us be clear: the reason China has accumulated the equivalent of 6pc of global GDP in reserves (like the US in the 1920s) is because it has held down its currency to gain market share.

As Michael Pettis from Beijing University points out tirelessly, the mercantilist policy hollows out US industries and forces America to choose between debt bubbles or unemployment – or, of course, protectionism, though we are not there yet.

Until it abandons that core policy, it has to keep buying foreign assets and lots of dollars. The euro can absorb only so much – 800bn euros so far – before Europeans realize (the French already realize) that Chinese bond purchases are double edged, and the yen the Swissie can't absorb anything at all. (The governments are intervening to stop it). Besides, China has the same misgivings about euro debt as it does about dollar debt. Perhaps more so after Euroland's long-running soap opera. So what Li Daokui said is not bad for the dollar as such. He said there is "$10 trillion" waiting to be invested in the US, if America will open its doors.

It is bad for bonds – or will be. The money will go into strategic land purchases all over the world, until the backlash erupts in earnest. It will go into equities, until Capitol Hill has a heart attack. It will go anywhere but debt.

While a hard-up America can only admonish those involved in the euro crisis, Chinese Premier Wen Jiabao is offering to be the savior. Beijing's price: more political credit and economic power. The EU must not be intimidated, however -- its bargaining position is better than it may seem at first.

A few years ago, critics from the United States and Europe gave their trading partner China a less-than-favorable name: In an insulting bit of latent racism, they dubbed the emerging superpower a "yellow peril." They warned of an army of Chinese minimum wage laborers, who would destroy entire industries in the West -- and with them millions of jobs. They also warned of growing political influence from the East, which could ultimately even lead to an erosion of human rights.

In recent months, the critics have gone quiet -- because they have far more important problems to worry about. Problems with many zeros on the end. At around $15.2 trillion (€11.1 trillion), the US government's debt at the end of 2012 could be as high as the amount of money the country generates in a year.

In Europe, the debt prognosis is hardly any better. Italy: €1.9 trillion (approximately 120 percent of annual economic output); Greece: €472 billion (150 percent). The debt clocks of America and the euro countries are ticking relentlessly, and the slogan "Money rules the world" is being given a new meaning. In record time, it seems the current global balance of power is shifting -- in favor of China.

On Monday, the US government fired an urgent warning towards Europe. The euro crisis threatens global growth, President Barack Obama said. "As long as this crisis is not solved, we will continue to see weaknesses in the global economy." But America itself is alarmingly high in debt; Obama's exhortation seems like cheap campaign rhetoric, a maneuver to divert attention away from his own serious problems.

America Warns While China Promises SalvationChina currently appears in quite a different light: The country has foreign exchange reserves of $3.2 trillion. The government is holding around a quarter of that in euro securities, mostly government bonds, said Daniel Gros of the Center for European Policy Studies in Brussels. According to the Financial Times Deutschland newspaper, China has more than tripled its financial commitment in Europe since 2007, and this trend is growing.

His country was ready to "extend a helping hand" and to invest more in European countries and the US, Chinese Premier Wen Jiabao said on Wednesday. China has already bought Greek and Portuguese government bonds, and, according to a report by London's Financial Times this week, debt-ridden Italy has recently wooed Chinese sovereign wealth fund CIC for money.

America can only warn, while China promises salvation: This is the new creed of the global debt crisis. The supposed "yellow peril" has positioned itself as a "white knight" which promises not to leave its trading partners in Europe and America in the lurch.

In return, however, Beijing is demanding a high price -- the Chinese government wants more political prestige and more political power:

Prime Minister Wen has called for more access to American markets, saying the US should be more open for Chinese investors. If China invests more in US companies, new jobs would also be created, he argues. As conciliatory as that sounds, however, the words are poison for President Obama given that high unemployement in the US could ultimately scupper his chances for re-election.

Wen is also demanding that the US lift restrictions on the export of high technology products to China. This would allow America to increase exports and improve its trade deficit. So far, US companies have held back from such a policy for fear their technology would be copied by potential Chinese competiters.

Far-reaching demands have also been made of Europe by Wen: European Union countries, he argues, should at last recognize the world's second largest economy as a market economy. He is hoping for a "breakthrough" to happen as soon as the next EU-China Summit on Oct. 25 in the Chinese city of Tianjin.

The demands are not all new -- but China is pushing them with increasing intensity. This is especially shown by the discussion about the recognition of China as a market economy. This would happen automatically in 2016, but for China that is not fast enough, as such a recognition would at a stroke reduce many barriers to trade. In particular, direct investment in Europe would become much easier.

'Euro-Zone Crisis Also Hurting China'Until now, the debate has been going in just one direction: To recognize China as a market economy sooner, Europe has demanded major concessions on human rights and the protection of intellectual property. China is now turning the tables: Much-needed support during the euro crisis will be available, it says -- if Europeans recognize China as having a market economy.

Europe must not be intimidated, however, because it is China's most important trading partner after the US. "The crisis in the euro zone is also hurting China," said Eberhard Sandschneider of the German Council on Foreign Relations (DGAP). "Not only because Beijing is holding a large amount of European debt securities, but also because the country wants to expand into Europe." In addition, Beijing has consistently stressed that the US dollar should be replaced as the key currency by a triumvirate of dollar, euro and Chinese yuan -- and therefore China wants to support Europe.

Thus, Europe's negotiating position is not all that terrible; it has more political leverage than it would appear at first. Not the least of which is the fact that the continent's ominous weaknesses act as a means of putting pressure on China; it might not be an over-exaggeration to say there is a certain balance of horror. If one fails, both fail.

Nevertheless, Europe will have to get used to the fact that China will be increasingly negotiating using the methods of the industrialized Western nations; that is to say, it will use its growing economic clout more and more as a political weapon. "The behavior of the Chinese government in the euro crisis has become a whole lot more confident," said Sandschneider. "This is the new reality with which Europe and America must deal with constructively."

China has punctured the last delusion. There will be no rescue of Italy until Europe agrees to major strategic concessions, and only after EMU's fiscal sinners clean house.

Chinese premier Wen Jiabao was soothingly polite in his speech to the World Economic Forum in Dalian, insisting that his country will play its part to "prevent the further spread of the sovereign debt crisis".

The language toughened a few notches when asked later how far China's Communist Party is really willing to go. The message was clipped and severe. Beijing will not sign a blank cheque for European states that have failed to carry out deep reform. "Countries must first put their own houses in order," he said.

Mr Wen said he had spoken to José Manuel Barroso, the president of the European Commission, laying the conditions for Chinese intervention. "I made clear to him that we are confident Europe will overcome its difficulties and make a full recovery. We have on many occasions expressed our readiness to extend a helping hand, and that we are willing to invest more in European countries."

"At the same time, we need bold steps to give redirection to China's strategic objective. We believe they should recognise China's full market economy status," he said, referring to World Trade Organisation (WTO) rules. "To show one's sincerity on this issue ... is the way a friend treats another friend," he said, answering a question after his speech.

Li Daokui, a rate-setter at China's central bank, warned that nobody should delude themselves about China's willingness to play the role of white knight. "I don't think any country can be saved by China in today's world. Countries can only save themselves by pushing through reforms," he told a panel at the forum, echoing language from German Chancellor Angela Merkel.

China's central bank must stop investing its hard-earned wealth in Western debt, switching instead into infrastructure, highways, railways and postal systems in countries such as the US, and even breaking the ultimate taboo by purchasing equities. "The incremental parts of our of our foreign reserve holdings should be invested in physical assets," he said.

"We would like to buy stakes in Boeing, Intel and Apple, and maybe we should invest in these types of companies in a proactive way." "Once the US Treasury market stabilises we can liquidate more of our holdings of Treasuries," he said.

The comments mark a shift in China's strategic thinking since the US was downgraded to AA+ by Standard & Poor's over the summer. Until now the stated policy has been to lower China's share of US debt holdings within its $3.2 trillion reserves by diversifying fresh money into other assets and currencies, rather than by running down its portfolio of US Treasuries.

Mr Li said America's "debt dynamic" is precarious and dismissed the debt-ceiling compromise between the White House and Congress as window dressing. "They are just trying to buy time and procrastinate," he said.

The suggestion that the Chinese government should build up strategic holdings in America's leading industrial and technology companies is likely to cause great unease on Capitol Hill. A switch into hard assets would be neutral for the dollar, allowing China to continue holding down its currency to maintain its global export share. The country is still accumulating $200bn in fresh reserves each quarter.

Whether the US and other Western states will allow the Chinese government and state companies to buy strategic chunks of their industry in this fashion is an open question. It would also mark a revolution in global central banking, where orthodoxy views equities as off limits for reserve holding.

Mr Li said any such plan by China would require a change in policy by Washington. "There is plenty of money ready to be invested in the US, but all you let us buy is Treasury bonds." He said China had shown itself to be a responsible stakeholder in the global system. "China is the most patient investor in the world. Imagine if our $3.2 trillion in foreign reserves had been controlled by George Soros: financial markets would be in much greater chaos," he said.

SAFE, the arm of the Chinese central bank that handles its foreign reserves, has accumulated roughly €800bn of eurozone bonds over the past decade, mostly from the AAA core such as Germany, France and the Netherlands. This has been a crucial factor explaining the strength of the euro. It has intervened a number of times in peripheral markets since the crisis began, allegedly accumulating €50bn (£43.48bn) of Spanish debt.

However, the relentless climb in Spanish and Italian yields over the summer indicates clear limits to Chinese buying. China's central bank has already suffered a large paper loss on Portuguese debt bought with much fanfare before that country needed a rescue.

Giulio Tremonti, Italy's finance minister, said it is hard to persuade Asian investors to buy Italian debt when the European Central Bank hesitates to do so. China's sovereign wealth fund - China Investment Corporation (CIC) - has been in talks with Italy but is more interested in buying key industrial and strategic assets.

Lou Jiwei, CIC's chief, came under attack in China for losses on US investments after the Lehman crisis. He is unlikely to risk his career a second time by taking a gamble on Italian or Spanish debt. He reportedly told a cadre of party leaders that Europe had done China a favour by repelling Chinese investment before the financial crisis. "They saved us a lot of money," he said.

Market status under the WTO has become the Holy Grail for China, not just because it makes the country less vulnerable to "anti-dumping" sanctions from the EU and the US but also because it marks the country's final coming of age in the global economy.

Beijing is bitter that the EU recognises the market status of Russia despite open violations of WTO rules by the Kremlin, claiming that the "double standard" is a disguised form of protectionism. Under its WTO accesssion accord in 2001, China remains a "non-market economy" for 15 years unless other members agree to fast-track the process. Beijing fears that the goalposts may shift again by the time 2016 arrives.

China has called for major strategic concessions from Europe before agreeing to rescue the eurozone, chilling hopes for immediate purchases of Italian bonds.

Premier Wen Jiabao said his country and will play its part to "prevent the further spread of the sovereign debt crisis," but warned that China will not sign a blank cheque for states that have failed to carry out full reform. "Countries must first put their own houses in order," he told the World Economic Forum in Dalian.

Mr Wen said he had spoken to José Manuel Barroso, the president of the European Commission, laying the conditions for Chinese intervention. "I made clear to him that we are confident Europe will overcome its difficulties and make a full recovery. We have on many occasions expressed our readiness to extend a helping hand, and that we are willing to invest more in European countries."

"At the same time, we need bold steps to give redirection to China's strategic objective. We believe they should recognise China’s full market economy status," he said, referring to World Trade Organisation rules. "To show one’s sincerity on this issue ... is the way a friend treats another friend," he said.

Li Daokui, a member of the monetary policy committee of China's central bank, warned that nobody should delude themselves about China's willingness to play the role of white knight. "I don't think any country can be saved by China in today's world. Countries can only save themselves by pushing through reforms," he told a panel at the forum, echoing langugage from German Chancellor Angela Merkel.

Professor Li said China must stop investing its hard-earned wealth in western debt and switch its incremental holdings into "physical assets", including the equities of major western companies. "China is the most impatient investor in the world. Imagine if our $3.2 trillion in foreign reserves had been controlled by George Soros: financial markets would be in much greater chaos," he said.

China has accumulated roughly 800bn euros of eurozone bonds over the last decade, mostly from the AAA core such as Germany, France, and the Netherlands. This has been a crucial factor explaining the strength of the euro. It has intervened a number of times in peripheral markets since the crisis began, allegedly accumulating €50bn (£43.48bn)of Spanish debt.

However, the relentless climb in Spanish and Italian yields over the summer indicates clear limits to Chinese buying. China's central bank has already suffered a large paper loss on Portuguese debt bought with much fanfare before that country needed a rescue. Italy's finance minister Giulio Tremonti said it is hard to persuade Asian investors to buy Italian debt when the European Central Bank hesitates to do so.

China's sovereign wealth fund -- China Investment Corporation -- has been in talks with Italy but is more interested in buying key industrial and strategic assets. Lou Jiwei, CIC's chief, came under harsh attack in China for losses on US investments after the Lehman crisis. He is unlikely to risk his career a second time by taking a gamble on Italian or Spanish debt.

Market status under the WTO has become the Holy Grail for China, both because it makes the country less vulnerable to 'anti-dumping' sanctions from the EU and because it marks the country's final coming of age in the global economy. Beijing is bitter that the EU recognises the market status of Russia despite open violations of WTO rules by the Kremlin, claiming that the "double standard" is a disguised form of protectionism.

Under its WTO accesssion accord in 2001, China remains a "non-market economy" for 15 years unless other members agree to fast-track the process. There could still be problems even after 2016 if major powers take a tough line.

The European Commission has predicted that economic growth in the eurozone will come "to a virtual standstill" in the second half of 2011. It halved its forecast for July to September to growth of just 0.2%, while the forecast for the last three months of the year is down from 0.4% to 0.1%. The commission blamed financial market problems over the summer as well as weakening demand from outside Europe. But it remained confident that there would not be a return to recession.

"Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued," EU Economic Affairs Commissioner Olli Rehn said at a news conference to unveil the report. "The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."

'Integral part'The report predicted that member states having to cut back on their spending to reduce their debt would also hit growth. One of the countries currently cutting back its spending is Greece, which reiterated on Wednesday that it was determined to meet all the deficit reduction plans it has agreed to in exchange for its two bailouts.

There were supportive comments from eurozone leaders towards Greece on Wednesday, which boosted the stock markets on Thursday. Eurozone leaders said Greece was an "integral" part of the eurozone.

Greece is set to receive the next loan from its initial EU and International Monetary Fund bailout later this month, but it will get this only if inspectors from the EU, European Central Bank and IMF agree that it is keeping up with its spending cut targets. There have been concerns that they may rule that Greece has fallen behind. Without this month's loan, Greece will not be able to meet its debt payments by the middle of next month.

Inflation steadyThe commission said that inflation would fall back faster than had been expected, because commodity price rises had slowed more than predicted. Also on Thursday, official figures from Eurostat showed that inflation in the eurozone stood at an annual rate of 2.5% in August, unchanged from July's figure.

The inflation figure for the whole of the EU was 2.9% in August, also unchanged from July. The commission predicted that those would also be the inflation figures for the whole of 2011.

The most scathing report describing in exquisite detail the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies and specifically its chief market strategist David Zervos.

"The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly - wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs - one for each country. That is going to require a US style socialization of each banking system - with many WAMUs, Wachovias, AIGs and IndyMacs along the way.

"The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks - even though it is probably a more cost effective solution for both the German banks and taxpayers... Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. "

Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You'll need it.

Full Report:

In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US sub prime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation - however, the days of excess spread collection and big commercial bank bonuses are now long gone. We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference - that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.

In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households - there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 - forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system - TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets. Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let's contrast this with the European debt crisis evolution.

In Europe, the subprime borrowers were sovereign nations. As the markets came to grips with this reality, countries were continuously shut out from the private sector capital markets. The regulators and politicians of course never fully understood the gravity of the situation and continuously fought market repricing through liquidity adds and then piecemeal bailouts. In many ways the US regulators dragged their feet as well, but they were forced into "getting it" when the uncontrolled default ripped the banks apart. Thus far the Europeans have been able to stave off default because there were only 3 borrowers to prop up - Portugal, Ireland and Greece. The Europeans were able to do something the Americans were not - that is "buy time" for their banking system. And why could they do this - because of the concentrated nature of the lending. In Europe, there were only 3 large subprime borrowers (at least so far), so it was easy to front them their unsustainable payments - for a while. But time is running out. Of couse, the lenders (ie the banks) have always been dead men walking!

At the moment, the European policy makers – after much market prodding - have finally come to grips with the gravity of their situation. And having seen the US bailout movie, they know all too well what happens when a default of this caliber rips through the financial system. The reason the EFSF was created in the first place was so that there could be some form of a European TARP when the piper finally had to be paid and the defaults were let loose. Certainly many had hoped the EFSF could be set up as a US style TARPing mechanism (like our friend Chrissy Lagarde suggests). The problem of course is that there are 17 Nancy Pelosis and 17 Hank Paulsons in the negotiation process. And while the Germans are likely to approve an expanded TARP like structure on 29-Sep, it increasingly looks like it may be too little too late. The departure of Stark, the German court ruling on future bailouts/Eurobonds, the statements by the German economy minister and the latest German political polls all suggest that Germany is NOT interested a full scale TARPing and TLPGing process across Europe. They somehow think they will be better off with each country going at it alone.

The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly - wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs - one for each country. That is going to require a US style socialization of each banking system - with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks - even though it is probably a more cost effective solution for both the German banks and taxpayers.

Where the losses WILL occur is at the ECB, where the Germans are on the hook for the largest percentage of the damage. And these will not just be SMP losses and portfolio losses. It will also be repo losses associated with failed NON-GERMAN banks. Of course in the PIG nations, the ability to create a TARP is a non-starter - they cannot raise any euro funding. The most likely scenario for these countries is full bank nationalization followed by exit and currency reintroduction. Bring on the Drachma TARP!! The losses to the remaining union members from repo and sovereign debt write downs at the ECB will be massive (this is likely the primary reason why Stark left). It will require significant increases in public sector debt and tax collection for remaining members. And for the Germans this will probably be a more costly path. Nonetheless, politics are the driver not economics. There is a reason why German CDS is 90bps and USA CDS is 50bps – Bunds are not a safe haven in this world – and there is no place in Europe that will be immune from this dislocation. Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. Picking winners and losers will be VERY HARD but let’s look at a few weak spots –SocGen 12b in market cap (-70% this year) with assets of 1.13 trillion BNP 31b in market cap (-55% this year) with assets of 2 trillion Unicredito 13b in market cap (-70% this year) with assets of 1 trillion Intesa 14b in market cap (-70% this year) with assets of 700b Compare this with the USA where we have - JPM 125b in market cap with assets of 2.1 trillion BAC 70b in market cap with assets of 2.2 trillion

Importantly, France GDP is only 2 trillion and in bank balance sheets are some 400% of that number. The banks are dead men walking with massive leverage to both home country income as well as assets. The governments are about to take charge and Europe as a whole is about to embark on a sloppy financial market socialization process that has been held back for nearly 2 years by 3 bailouts. The weak links will not be able to raise enough Euros/wipe out enough private sector equity to get this done, so there will be EMU members that need to exit and use a reintroduced currency for this process. We put a Greek drachma on the front cover of our Global Fixed Income Monthly 20 months ago for a reason.

Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default, said Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union.

"This debt is unpayable," Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. "Greece should default, and default big. A small default is worse than a big default and also worse than no default."

World Bank and International Monetary Fund officials will meet in Washington Sept. 23-25 as European Union officials work to keep the currency union from unraveling and the Greek crisis worsens. Europe is facing "a full-blown banking crisis" said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., in an interview yesterday.

Rescue programs backed by the IMF and European Central Bank are "recession-creating" efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland "under tremendous pressure to at least symbolically default" on some of its debt, he added.

'Totally Ridiculous'"It’s totally ridiculous what is going on," Blejer, 63, said. "If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year."

The statements by Blejer, who ran Argentina’s central bank in the months after its default on $95 billion in debt, put him at odds with German Chancellor Angela Merkel, who said the risks of contagion from a Greek default are too big and that an "uncontrolled insolvency" would further agitate turbulent global markets.

German coalition officials stepped up their criticism of Greece last week after a delegation from the European Commission, European Central Bank and IMF suspended a report on progress made in Athens toward meeting the terms of its rescue program. The delay threatened to derail a payment to Greece due next month.

"It doesn’t make sense to give money to Greece so Greece can pay the Germans back," Blejer said when asked about the aid programs. "All these projects, all the euro projects don’t make sense economically."

'Recipe for Disaster'Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution in Washington, said a "disorderly default" in Greece would be "a recipe for disaster." "The spreading of the European crisis has gone so far that it would be really impossible to contain its spillover effects to the rest of the euro area," Lombardi said in an interview. An orderly default with private investor engagement would be better for Greece, he said.

Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Prime Minister George Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.

It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.

'Very Complicated'Blejer didn’t advocate Greece leaving the euro zone, which he said would be a "very complicated" move that would force a rewriting of business contracts and would push more lenders toward bankruptcy. Germany and France will have to bear the brunt of financing efforts to help Greece and other countries that default re-start their economies, he said.

"Someone will have to pay," said Blejer, who is a vice chairman of mortgage bank Banco Hipotecario and a board member of energy company YPF SA. "If they are not willing to pay for the euro they will have to get out of the euro."

Greece’s 10-year bond yield rose 94 basis points, or 0.94 percentage point, to 24.48 percent at 5 p.m. in New York, after earlier climbing to a euro-era record of 25 percent. Italian borrowing costs also jumped at a 6.5 billion-euro ($8.8 billion) bond auction yesterday as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations. Italy’s Treasury sold 3.9 billion euros of a benchmark five-year bond to yield 5.6 percent, up from 4.93 percent for similar maturity securities sold in July.

Argentina CrisisBlejer took the reins of Argentina’s central bank for five months starting in January 2002, when the country was reeling from the effects of its default and the loss of four presidents in just over two weeks. The government had just ended the peso’s one-to-one peg with the dollar when Blejer accepted the position from then-President Eduardo Duhalde. To help stabilize the currency after the devaluation, Blejer created short-term bonds known as lebacs that paid an annual interest rate of as much as 140 percent, he said.

Argentina’s economy shrank 10.9 percent in 2002 before starting a nine-year growth streak, aided by rising commodity prices and an expansion in neighboring Brazil. Blejer left the central bank in June 2002 after disputes with then-Economy Minister Roberto Lavagna over lifting restrictions on the withdrawal of bank deposits.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are "convinced" Greece will stay in the euro area as they faced international calls to step up efforts in fighting the region’s debt crisis.

The euro rose after the leaders of Europe’s two biggest economies issued a statement yesterday following a telephone conversation with Greek Prime Minister George Papandreou. It erased most of those gains today. Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout, according to statements from governments in Berlin, Athens and Paris.

European governments are aiming to ratify a July 21 agreement to bolster the euro region’s bailout fund and extend a second rescue to Greece. Investor skittishness over the spread of the debt crisis has raised banks’ funding costs and roiled markets worldwide.

"I am skeptical that this will help to reassure markets," Tullia Bucco, an economist at UniCredit Global Research in Milan, said of the leaders’ statement. "The road to the implementation of the second aid package is still quite long and may prove bumpy." The euro was up 0.1 percent to $1.3731 at 8:43 a.m. in Berlin, as futures on the Euro Stoxx 50 Index added 1.2 percent.

Geithner’s TravelsTreasury Secretary Timothy F. Geithner will travel to Wroclaw, Poland, to attend a session for the first time of the European Union’s Economic and Financial Affairs Council that begins tomorrow. Chinese Premier Wen Jiabao yesterday called on other countries to "put their houses in order." Underscoring divisions in Europe, European Commission President Jose Barroso said he was close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the sovereign debt crisis.

"The commission will soon present options for the introduction of euro bonds," Barroso told the European Parliament yesterday in Strasbourg, France, prompting applause from lawmakers who have backed the idea and a swift rejection from officials in Berlin. "Some of these options could be implemented within the terms of the current treaty; others would require treaty change."

In the three-way telephone call, Papandreou committed to enacting policies demanded by the EU and International Monetary fund to keep the bailout funds flowing. Sarkozy and Merkel "are convinced that the future of Greece is in the euro zone," the French statement said.

Greek StepsThe Greek Cabinet this month endorsed measures to help meet deficit targets of 17.1 billion euros ($23.6 billion) in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession. The fulfillment of Greece’s adjustment program is "more than ever" essential and is a condition for the payment of further aid tranches, Merkel said in the call, according to an e-mailed statement from her chief spokesman, Steffen Seibert.

Papandreou said Sept. 10 that the government’s top priority is "to save the country from bankruptcy" and said he would do whatever is necessary to meet targets. Putting austerity programs into place "is indispensable to establish sustainable and balanced growth in Greece," according to the statement issued in Paris. "The success of the Greek plan will provide stability to the euro zone."

European banks are woefully short of capital to cope with multiple losses on euro-zone sovereign bonds. That was obvious long before Christine Lagarde, managing director of the International Monetary Fund, said so publicly in August.

It was clear from this year's European "stress test" disclosures, which showed a capital shortfall of €80 billion if Greek, Irish, Portuguese, Spanish and Italian debt had been marked to market prices. That deficit would rise to over €200 billion if the pass rate had been a 9% core Tier 1 capital ratio, Morgan Stanley estimates. That is similar to the initial IMF analysis.

But this only tells part of the story. Any losses arising from multiple restructurings of euro-zone sovereign debt are sure to go well beyond merely first order effects given the scale of interconnectivity. If the euro zone started to fall apart—perhaps as a result of an ECB refusal to keep funding Greek banks—the consequences would be incalculable as instant deposit flight led to a toppling of peripheral country banking systems. It is hard to see what scenario banks should be recapitalizing themselves to withstand, bearing in mind official euro zone policy is that there will be no sovereign defaults beyond Greece.

Besides, stock market valuations suggest markets are now focused on extreme scenarios. French bank shares have halved since the summer, yet they remain among Europe's highest-rated banks even after Moody's downgraded Société Générale and Crédit Agricole Tuesday. BNP Paribas, which escaped a downgrade, is one of only six banks globally rated double-A after Moody's concluded it had capital to withstand severe haircuts on all peripheral government bond exposures and continues to generate capital. Its 13% return on equity in the first half of 2011 was the highest among globapeers. Yet BNP Paribas trades on 0.4 times book value. Société Générale and Crédit Agricole trade on 0.3 times.

For French banks—in common with all euro-zone banks—the real challenge is funding. Short-term dollar funding from U.S. money market funds is shrinking. But banks have plenty of access to short-term euro liquidity, including from the ECB, and can use foreign-exchange swaps to access dollars while they run down positions. BNP Paribas and Société Générale have said they will run down or sell U.S. dollar funded businesses.

The closure of medium and long-term bond funding markets is a potentially bigger challenge. French banks may have largely fulfilled their funding needs for 2011 but they all face heavy refinancing needs in 2012. If markets remain closed, they will be forced to deleverage even faster, threatening a credit crunch and feedback loops to the economy. But this merely underlines the need for the euro zone to come up with a comprehensive solution to its sovereign crisis. Until it does, bank investors are right to fear the worst.

Europe's financial crisis intensified Wednesday as banks moved to obtain more dollars for loans to their U.S. customers, and some nervous corporate clients began looking to banks outside the euro zone for loans.

Tensions in the 17-nation euro zone are increasing despite attempts by central banks to pump badly needed dollars into the region, as U.S. sources have shrunk. On Wednesday, the European Central Bank said two banks had tapped it for $575 million, only the second time in six months the ECB has doled out dollar funding. The names of banks that tap the ECB are kept confidential.

European banks need the U.S. currency to fund loans they have extended to U.S. companies and consumers. European banks also need dollars to repay past borrowings they made in dollars, such as loans from U.S. money-market funds.

As expected, Moody's Investors Service downgraded Société Générale's long-term debt by one notch to Aa3—three notches below triple-A—with a negative outlook. It lowered Crédit Agricole's rating to Aa2, one notch higher, and also kept it on review. Moody's maintained BNP Paribas's rating at Aa2 but kept it on review for a possible downgrade. Weaker credit ratings can mean it costs a company more to borrow.

The deepening problems illustrate how sovereign-debt concerns in Greece, Ireland and other places, which date to early last year, have spilled into the broader market. While problems haven't reached 2008 levels, they have caused increasingly tough consequences for Europe's banks.

Some French banks' corporate clients, for example, have sought financing from banks outside Europe to lessen their reliance on French banks as a hedge in case lending dries up, according to people familiar with the situation.

The clients include energy and commodity providers, from oil giant BP PLC to midsize companies, which need liquidity for day-to-day operations, such as the transportation of oil and other commodities. Société Générale and BNP are among the key providers of this financing, which accounts for some 10% to 15% of their annual profits, according to analyst estimates. Now, several major companies that have relied on them in the past are turning elsewhere. "If European markets close, they don't want to have a funding gap. They want to be ready," said a person involved in some of the talks.

U.S. banks, stuffed with deposits thanks to U.S. networks of branches and access to central bank money, have received requests from European companies seeking loans. One energy company is talking with Citigroup Inc. about obtaining a $1 billion credit line for its shipping operations amid fears that renewing credit with European lenders could prove too expensive, according to a person familiar with the matter.

It isn't just natural-resources companies that have been tapping banks outside the euro zone. Some European banks have for the first time approached Japanese bank Nomura Holdings Inc. for ideas on how to access dollars from investors in Asia, according to a person familiar with matter. However, BNP Chief Executive Baudouin Prot said he isn't seeing evidence of big European companies lining up alternative financing.

European banks have lost access to more than $700 billion in U.S.-dollar funding—short-term IOUs and interbank loans—over the past year from U.S. money-market funds and others worried about exposure to Greece and other troubled European economies, according to J.P. Morgan Chase & Co. and CreditSights research. That has forced the banks to curtail dollar-denominated lending and find dollars far afield, such as in the Middle East. Banks need dollars to fund dollar-denominated loans and other obligations.

"Things are deteriorating," said Joseph Abate, a money-markets specialist at Barclays Capital in New York. "This week and certainly probably since August, it seems like their access to unsecured [funding] really has tightened up." Jonathan Loynes, an economist at consultancy Capital Economics in London, says he fears the mix of fiscal belt-tightening, a loss of confidence among consumers and businesses and, now, the risk that financing costs may go higher in parts of Europe will lead to a 0.5% contraction in euro-zone output next year and a further 1% slide in 2013. "There are growing concerns that we are going back into a credit crunch," he said.

That is partly because U.S. banks and stronger European banks aren't overly eager to fill the lending gap left by French and other banks. Nearly all lenders have seen their funding costs rise at least moderately in recent weeks, and are cautious about lending to companies in Europe's uncertain economic environment, said executives at major U.S. and U.K. banks.

Bank executives and traders said deep pools of liquidity remain. Foreign banks, for example, have parked $848.7 billion at the Federal Reserve. Still, concerns are growing among U.S. regulators. In an interview with CNBC Wednesday, U.S. Treasury Secretary Timothy Geithner called problems in Europe "a dominant concern." He said the issue matters to the U.S. "because it adds to a caution around the world at a time when…we're still healing from the crisis."

In efforts in the past week to reassure investors and clients, chief executives at BNP Paribas and Société Générale said they are moving to reduce their need for dollars. In one sign banks still have avenues to obtain dollars, a senior bank trader in London said that in the so-called repurchase market, where banks exchange collateral for dollars, European banks are still able to obtain loans.Société Générale has said it is cutting back on certain lending, such as loans in the aircraft and shipping industries.

In trading on Wednesday, Société Générale shares fell 2.9%, or €0.515, to €17.385, while BNP Paribas declined 3.9%, or €1.10, to €26.90. Crédit Agricole added 1.2%, or €0.063, to €5.216. A person familiar with Société Générale's corporate-funding business said that the bank is still providing money to key clients and that its long-term expertise in finance-advisory and related services will keep that part of its businesses strong.

Spanish banks sharply increased borrowing from the European Central Bank in August as a deepening sovereign-debt crisis cut off alternatives for banks in Southern Europe. According to data released by Spain's central bank on Wednesday, gross borrowing by Spanish banks from the ECB hit €81.22 billion in August, up 42% from €57.20 billion in July. U.S. money-market funds continue to curtail lending to European banks. When the funds do extend IOUs, they are doing so for shorter terms in order to protect themselves, analysts said.

The market where banks provide loans to one another is under stress, according to CreditSights. Bank loans to other euro-zone banks had fallen by €600 billion during a one-year period through June. A benchmark bank borrowing rate continued to increase. The three-month dollar London interbank rate edged up to 0.3491% on Wednesday, from 0.3471% on Tuesday. In June, the rate was around in 0.254%. Mr. Abate, the Barclays analyst, said earlier this week the rate could hit 0.50% by year end.

The move by Moody's in France wasn't as severe as some investors expected, with BNP Paribas dodging a downgrade and Société Générale avoiding a two-notch downgrade that Moody's warned of in June. Moody's ratings for Société Générale and Crédit Agricole remain above those of other ratings firms. Moody's factored in potential losses of 60% on Greek sovereign debt for the French banks, much larger than the 21% write-downs they have taken already.

The French government is determined to monitor the banks' efforts to strengthen their equity capital and will guarantee the soundness of the country's financial system, spokeswoman Valerie Pecresse said after the weekly cabinet meeting. Bank of France governor Christian Noyer said any talk of the nationalization of French banks "makes no sense and is completely surreal."

Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis. "Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event," said Peter Tchir, founder of hedge fund TF Market Advisors in New York. "Clearly this austerity plan is not working."

It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA. Greek bonds plunged, sending the 10- year yield to 25 percent for the first time.

German Chancellor Angela Merkel said she won’t let Greece go into "uncontrolled insolvency" as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year.

The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value if the nation fails to meet its obligations. CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated credit- swaps market, lowered its recovery assumption to 38 percent late yesterday, which would give Greece a 95 percent chance of default.

Economy to ShrinkGreece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.

Greece’s 10-year bond yield rose 111 basis points, or 1.11 percentage points, to 24.65 percent as of 1:55 p.m. in London, after earlier climbing to a euro-era record of 25 percent. The two-year note yield increased 662 basis points to 76.17 percent, after rising to an all-time high.

Greek stocks fell, with the ASE Index tumbling as much as 1.2 percent to the lowest since 1995 and down more than a third from July 22. The risk of contagion beyond Greece weakened the euro and boosted benchmark German bunds. The common currency fell toward its weakest level since 2001 against its Japanese counterpart, declining 0.6 percent to 104.99 yen.

Sovereign RecordAn index measuring the cost of default protection on 15 European governments to a record. European bank debt risk also jumped to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps climbed one basis points to 354, an all-time high based on closing prices. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers increased two basis points to 316, while a gauge of subordinated debt risk was up seven basis points at 557, according to JPMorgan Chase & Co.

"The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too," Suki Mann, a strategist at Societe Generale SA in London, wrote in a note yesterday. "This trio are already under intense pressure, but it will get much worse."

Euro-Region NationsCredit-default swaps on Portugal, Italy and France rose to records, according to CMA. Portugal jumped nine basis points to 1,224, Italy rose four basis points to 510 and France was up 7.5 basis points at 196.5.

Germany’s government is debating how to support its nation’s banks should Greece fail to meet the budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Merkel said in an interview with Berlin-based Inforadio that avoiding an "uncontrolled insolvency" was her "top priority" and that the region’s most indebted country is taking the right steps to getting its next bailout payment.

Credit-default swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all- time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week. Swaps on SocGen were 14 basis points higher at 448.5, Credit Agricole increased 9.5 to 331.5 and BNP Paribas rose 16 basis points to 321, according to CMA.

Moody’s placed the three banks’ ratings on review in June to examine "the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels," the rating company said at the time. Downgrades are likely as the review period concludes, said people with knowledge of the matter, who declined to be identified because the information is confidential.

A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. An increase signals declining perceptions of credit quality. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

German Chancellor Angela Merkel has tried to bring her coalition partners back in line following rogue comments on a possible Greek bankruptcy and exit from the euro zone. She is desperate to restore calm in her ranks to avoid exacerbating the crisis and to gain time to prepare for worst-case scenarios.

These days, when Angela Merkel and Nicolas Sarkozy issue a joint statement, it usually means that the debt crisis has fallen into a state of greatest possible uncertainty. It's when the German chancellor and the French president feel compelled to call for quiet and discipline. The message to be expected at these times is that the euro is safe, the Greeks have understood what must be done and that everything is under control -- even if nothing really is.

Tuesday, midday, appeared to be one such time. A news agency had reported that a joint German-French statement on the euro bailout was expected imminently. The news was followed a half-hour later by denials -- first from Paris and later from Berlin. "There will be no paper on Greece today," Merkel stated personally during a press conference held after a meeting with Finnish Prime Minister Jyrki Katainen in the chancellor's offices, the Chancellery.

There was little Merkel could do about the false report. The rumor appeared to have originated somewhere close to the French government. Nevertheless, the latest confusion was symptomatic. The chancellor's crisis management isn't going well, and the policies being pursued in efforts to rescue the euro are appearing more and more like some kind of odyssey.

Merkel, who heads the conservative Christian Democratic Union party, is in a dilemma. Germany, as the continent's economic engine, has a duty to hold the European Union and the euro zone together at this difficult time. But Merkel must also pay attention to growing skepticism amongst the German public, and she must explain and justify her actions to critics within her own political ranks. That obviously works best when, at the very least, Merkel's cabinet -- comprised of the her CDU, it's Bavarian sister party the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) -- demonstrates unity and speaks with one voice. Precisely the opposite is happening right now, with a growing number of soloists in the unruly choir of her coalition.

A Rebuke for Merkel's Economics MinisterThis week, Merkel had to call her vice chancellor and economy minister, Philipp Rösler of the FDP, back into line after he said there should be no "taboos" on Greece and mentioned the possibility of an orderly bankruptcy for the country in a newspaper guest editorial on Monday. Rösler must have felt like a schoolboy being scolded by his teacher. Merkel was said to have been furious about his statements. And it is doubtful she found much pleasure in the fact that he then defiantly stuck with his words after the rebuke. "More and more people are asking themselves how Europe will proceed," Rösler told the Rheinische Post newspaper. "Honest answers are rightly being demanded about how to deal with countries that don't adhere to their reform commitments."

Merkel's other coalition partner, Bavaria's CSU, not only welcomed Rösler's words -- it also issued its own position paper in which it did not rule out the idea that highly-indebted states should leave the euro zone. It was yet another move that did not exactly add to unity within Merkel's coalition.

The chancellor is trapped between two coalition partners who are each pursuing their own domestic political agenda. On the one side, she has an FDP that risks sliding into irrelevance following a dramatic slump in voter support, and is desperate to sharpen its profile. On the other, she has a CSU that is seeking to regain its absolute majority in the Bavarian state parliament in 2013. On Tuesday, she sought to reach out to these partners using a diplomatically formulated appeal during her joint appearance with the Finnish prime minister. She said she was convinced that the parties in her cabinet were united on the path to save the euro.

Merkel Navigates According to Visual Flight RulesMerkel is keen to avoid talking openly about a Greek insolvency because she regards the consequences of such a move as incalculable. After all, what would happen if Greece actually did officially declare it was insolvent or the country even left the currency union? Experts are divided on this. Would the situation calm down because, finally, there was no more horrific news coming out of Athens? Or would it worsen because a large number of banks would be exposed? Would the Greek economy be permanently ruined? And would a domino effect hit Spain, Ireland, Portugal and Italy?

These are all risks Merkel doesn't want to take -- at least not yet. She is trying to keep up the pressure on Greece, partly in order to assuage MPs in her party who doubt the country can be rescued. At the same time, she is urging patience and caution. "It will be a very long, step-by-step process," Merkel reiterated on Tuesday. The chancellor appears to be flying blind. She doesn't know what risks are going to pop next: Will it be Rösler, Seehofer -- or a fresh crop of bad news from Athens? She knows very well that Greece is in dire straits. She also knows that an insolvency cannot be ruled out. At the same time, she doesn't want to fan the flames. She would prefer to have the experts in her government quietly play out the worst-case scenarios internally.

The first thing that must happen in preparation for this worst-case scenario is the establishment of the expanded European Financial Stability Facility (EFSF). This is because it is the EFSF, with an expanded toolbox of financial instruments at its disposal, which will be the first institution that could absorb a Greek bankruptcy -- that's one area experts in the German Finance Ministry are certain about. The vote in the German parliament on expanding the EFSF's powers is set for the end of September.

Merkel and European Commission President Jose Manuel Barroso just reiterated that the rescue fund should be up and running by October. That's the month when Greece's finances could ultimately dry up. If the troika comprised of the International Monetary Fund, the European Central Bank and the European Commission conclude that Athens hasn't fulfilled the reform conditions stipulated, then the next tranche of previously agreed to aid for Greece will not be paid out.

On Wednesday, French President Sarkozy and Chancellor Merkel will take Greek Prime Minister George Papendreou to task yet again in a conference call. It is quite possible there may be another joint German-French statement afterwards. The message: Everything is under control.

Economists say that as much as some German politicians wish Greece would leave the euro zone, such a thing is easier said than done. Adopting the euro was designed to be irrevocable, and European Union treaties don't contain provisions that would permit a country to leave. Amending the treaties could take years and requires unanimous agreement—including that of any country threatened with expulsion.

That means Greece can't be pushed out against its will. But Citigroup's chief economist, Willem Buiter, argues in a new paper that the other countries could make life so difficult for Greece that is has no choice. After all, Greece depends almost entirely on loans from the euro zone and International Monetary Fund, which are providing the credit for Athens to run budget deficits and repay maturing debts. The European Central Bank is providing badly needed liquidity to Greece's enfeebled banks. Those spigots could be shut off.

But such an action would be hugely costly, Mr. Buiter says. Once cut off, Greece would have little ability, or incentive, to service its euro-denominated debts. Banks across Europe holding Greek bonds would suffer giant losses. More important, he adds, a wider market rout could follow. "When Greece can exit," he writes, "any country can exit." Markets, he adds, will shift their focus to the next-weakest countries, and depositors would flee those countries' banks.

Might it be possible, though, for Greece to negotiate a "friendly" withdrawal from the currency union? After all, freeing Greece to devalue its currency, a step that would make Greek goods and tourist destinations cheaper for foreigners, could help the country boost its exports and revive its economic growth.

This path is fraught with trouble, too. Perhaps the biggest challenge: How to keep capital and bank deposits inside the country before the changeover. Greek citizens would have every incentive to keep their savings in euros rather than a new currency with a plunging value, by rushing their money out of the country if necessary.

If Greece decided to leave, "the obvious response of anyone with exposure to the secessionist banking system is to withdraw money from the bank as quickly as possible," economists at Swiss bank UBS write in a paper published this month.

Such a debilitating bank run would likely happen before any actual secession—and it would very possibly spread to other weak countries, precipitating an even bigger mess. A destabilizing Greek default is easier to imagine than a euro exit.

Budget figures released Monday make clear Greece is far from reaching its EU-imposed deficit targets this year. It will need either more aid money or more painful austerity measures to cover the shortfall. The first would be deeply unpopular with the German taxpayers footing the bill. The second is already provoking howls of outrage from Greeks.

Societe Generale SA, the French bank that has shed more than a quarter of its market value this month, risks becoming the target of a takeover by a foreign bank, a French lawmaker said. "We’re headed for a takeover attempt on Societe Generale by a foreign bank at a good price," Jean-Pierre Balligand, a Socialist lawmaker who sits on the finance committee of the National Assembly, said in an interview. "It would be taking advantage of the euro crisis and that’s not good for France."

The remarks underline French political anxiety about the independence of the nation’s major lenders in the face of a sovereign debt crisis that has crimped their ability to raise funds. Shares of major French banks have dropped this year on concerns about their holdings of sovereign debt in Greece, Portugal, Ireland, Italy and Spain and the growing reluctance of money-market funds to lend to them.

Moody’s Investors Service cut Societe Generale’s debt and deposit ratings by one level today to Aa3 from Aa2 with a negative outlook and Credit Agricole SA’s long-term ratings to Aa2 from Aa1. BNP Paribas SA’s Aa2 long-term rating was kept on review for a possible cut.

Before today, BNP Paribas had slid 41 percent in Paris trading this year, Credit Agricole had fallen 46 percent and Societe Generale had dropped 55 percent on escalating concern that the European sovereign debt crisis is turning into a banking crisis. Societe Generale has fallen more than 27 percent just this month.

'Not a Solution'The market value of Societe Generale, France’s third- largest bank by assets, is now about 13.4 billion euros ($18.3 billion). In contrast, New York-based JPMorgan Chase & Co. is valued at $126.7 billion.

Societe Generale Chief Executive Officer Frederic Oudea dismissed speculation of a merger or takeover, pointing out that most lenders’ shares have tumbled and that a "big" banking merger wouldn’t help solve the euro-region crisis. "I don’t think a big merger is the solution to this crisis of confidence," Oudea said in an interview yesterday with Bloomberg Television in New York.

Societe Generale spokeswoman Helene Mazier declined to comment on remarks made by lawmaker Balligand, saying the bank doesn’t comment on speculation. Societe Generale was the subject of takeover speculation in 2008 when it said it lost 4.9 billion euros because of unauthorized transactions by trader Jerome Kerviel. French Prime Minister Francois Fillon said then that "Societe Generale is a great French bank and will remain a great French bank."

European Commission President Jose Barroso said he is close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the debt crisis.

"The commission will soon present options for the introduction of euro bonds," Barroso told the European Parliament in Strasbourg, France, today, prompting applause from lawmakers who have backed the idea. "Some of these options could be implemented within the terms of the current treaty; others would require treaty change."

The idea of bonds sold jointly by the euro area’s 17 nations remains alive because unprecedented bailouts by governments and the European Central Bank have failed to stamp out debt concerns that began in Greece almost two years ago and rattled markets in AAA rated France last month.

The disagreement over collective debt guarantees underscores the worries of policy makers outside Europe over euro leaders’ inability to solve the crisis. U.S. Treasury Secretary Timothy F. Geithner will travel to a meeting of European Union finance ministers in Poland this week to urge them to step up their efforts amid Obama administration concerns that the region’s woes may hurt the U.S. economy.

Greek Conference CallGerman Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou will hold a conference call at about 7 p.m. today Athens time to discuss developments in Greece and the euro area.

European authorities "need to do whatever they can do to calm these pressures," Geithner told Bloomberg Television Sept. 9. "They have to demonstrate they have enough political will." The commission said in August that it may present draft legislation on euro bonds when completing a report on the feasibility of common debt sales. The commission opposed such a step earlier this year because of German-led objections.

"We are opposed as far as the instrument of euro bonds is concerned because we believe you can’t fight debt in Europe by making it easier to take up debt," German Foreign Minister Guido Westerwelle told reporters in Berlin today. Merkel’s government will react specifically to Barroso’s proposals when they are on the table, he said.

In France, spokeswoman Valerie Pecresse restated her government’s concerns. "Mutualization of debt is an arrival point, not a departure point," she told reporters in Paris. She said euro bonds "would be the final stage of a process of convergence. Right now there’s a consensus that the step to take is repairing public finances."

Feasibility StudyEU Economic and Monetary Affairs Commissioner Olli Rehn said in July that the feasibility study on common bond issuance would be ready "toward the end of the year." "We must be honest: this will not bring an immediate solution for all the problems we face," Barroso said today. He also called Greece’s latest budget-austerity measures "significant."

The Greek government decided on Sept. 11 to cut one month’s wages from all elected officials and impose an annual charge on all property for two years in a bid to qualify for another installment of international aid. The aim is to meet 2011 and 2012 targets for narrowing the budget deficit and to cover a shortfall for this year that has been exacerbated by a deepening recession, according to Finance Minister Evangelos Venizelos. "The Greek government has taken significant steps," Barroso said. "I urge Greece to finalize these efforts."

Greece is seeking this month to win a sixth tranche of loans under last year’s 110 billion-euro ($150 billion) aid package from the euro area and International Monetary Fund and to avoid a default. Prime Minister George Papandreou’s government also wants to benefit from a planned second aid package of 159 billion euros approved by euro-area leaders on July 21. "What we need now is Greece to fully carry out its reform program," Barroso said.

European banks are losing deposits as savers and money funds spooked by the region’s debt crisis search for havens, a trend that could worsen economic and financial conditions.

Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks.

While the European Central Bank has picked up some of the slack, providing about 500 billion euros ($685 billion) of temporary financing, banks are cutting lending, which could slow growth in their home countries. They’re also paying more to keep and attract deposits -- or, in the case of Italy, selling bonds to retail customers for five times the interest they offer on savings accounts -- which will erode profitability.

"All of this is symptomatic of a lot of fear in the European financial sector," said Kash Mansori, senior economist at Experis Finance in Charlotte, North Carolina, which advises U.S. and European companies. "It shows that even European banks don’t trust each other anymore, so they’re taking their money out of the EU system. It’s similar to the distrust that happened worldwide in 2008."

Deposit ErosionDeposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data.

In Germany, deposits by financial institutions, which account for one-third the total, declined 12 percent over the same period and 24 percent since the September 2008 collapse of Lehman Brothers Holdings Inc., ECB figures show. In France, where the erosion started last year, the same type of deposits, which make up half the total, are down 6 percent since June 2010. They have fallen 14 percent since May 2010 at Spanish banks, where they account for one-fifth of the total.

Deposits include money kept in banks by individuals and companies. Most of the short-term funding supplied by financial institutions and money funds is counted as deposits by the ECB and other central banks in Europe.While retail deposits at Italian banks have fallen only 1 percent in the past year, the outflow of money from financial institutions has exceeded $100 billion, a 13 percent decline, according to Bank of Italy and ECB data.

Money-Fund WithdrawalSome of the retail deposits have been invested in bank bonds sold directly to retail clients that pay as much as 5 percent, compared with an average interest rate on deposits of 0.88 percent. Retail investors in Italy own about 63 percent of bank debt, compared with a European average of 48 percent, data compiled by the Bank of Italy and banking association ABI show.

In Portugal, where banks raised the interest rates they pay savers, non-residents have reduced deposits by 19 percent since March 2010. The eight largest U.S. money-market funds halved their lending to German, French and U.K. banks over the past 12 months and stopped financing Italian and Spanish financial firms, according to data compiled by Bloomberg from investment reports.

A survey by Fitch Ratings showed that U.S. money-market funds reduced their lending to European banks by 20 percent from the end of May through July. The funds cut investments in Spanish and Italian lenders by 97 percent, to German firms by 42 percent and to French ones by 18 percent, Fitch said. The Aug. 22 survey covers almost half the $1.53 trillion assets held by money funds in the U.S.

To make up the deficit, firms are leaning on the ECB for short-term funding. Borrowing by Italian lenders from the central bank more than doubled to 85 billion euros between June and August. Greek and Irish banks each took about 100 billion euros from the ECB in August. Irish lenders also got 56 billion euros from their domestic central bank. Portuguese banks borrowed about 46 billion euros from the ECB, while Spanish banks took 52 billion euros in July. The ECB said today it will lend $575 million to two euro- area banks, without identifying them, a sign that they’re finding it difficult to borrow the U.S. currency in markets.

‘Left With Garbage’By accepting those countries’ bonds as collateral in exchange for funds, the ECB is piling up risk, said Desmond Lachman, a fellow at the American Enterprise Institute in Washington. In the event of a default, the ECB’s losses would be borne by the EU’s member states. Lending to the region’s banks by the ECB and other central banks is about seven times the capital of the Eurosystem, the consolidated balance sheet of all euro zone central banks.

"If there are sovereign defaults, the ECB will be left with garbage that has been accepted as collateral," said Lachman. "It’s putting EU taxpayers’ money at risk in a very non-transparent way. But there’s no alternative. The ECB is the only game in town."

ECB Defends ActionsWilliam Lelieveldt, a spokesman for the ECB in Frankfurt, declined to comment about the risk to the central bank. ECB President Jean-Claude Trichet has defended his institution’s actions. European banks have more collateral that they can place with the ECB in exchange for additional financing if they need it, he said Sept. 8 in Frankfurt. "We stand ready to provide liquidity as we have done in the past," Trichet said.

The outflow of deposits is a measure of eroding trust in the region’s financial system. Banks outside of Greece, Ireland, Portugal and Spain have $1.7 trillion at risk in loans to those countries’ governments and corporations, as well as guarantees and derivatives contracts, according to the Bank for International Settlements.

Concern that those nations will default or leave the EU and devalue their currencies has hastened the flight, according to Dimitris Giannoulis, a Deutsche Bank AG analyst based in Athens. People "are now afraid of the possibility of returning to the drachma," said Giannoulis, referring to the Greek currency in circulation before the country adopted the euro in 2001. "Just a headline is enough to spook depositors."

Irish Banks HurtIrish banks have been the hardest hit. Losses on the collapsing real-estate market and a government guarantee of bank liabilities forced the nation to seek EU assistance in November. The money started flowing out in early 2010 as confidence in the government’s ability to support the banks waned, and it accelerated later that year after Ireland’s rescue by the EU led multinational companies to move deposits out of the country.

Ireland took control of five lenders and is winding down two of them. Even Bank of Ireland, which wasn’t nationalized because its losses weren’t as catastrophic, saw deposits dwindle by 20 billion euros, or 23 percent, last year.

At Allied Irish Banks Plc, Ireland’s second-largest lender, deposits declined 37 percent over the past 18 months. The bank said July 25 that most of the drop occurred at the end of 2010 and in the first quarter of this year as companies pulled money amid sovereign and bank downgrades. Deposits since the end of the first half have been "broadly stable," said Alan Kelly, the lender’s director of corporate affairs and marketing, who declined further comment.

‘Afraid of Them’While "the rate of outflow is falling," Finance Minister Michael Noonan said on Sept. 1 in Dublin, that hasn’t soothed savers such as Phil Carey, an 86-year-old mother of eight from Galway in western Ireland. "I wouldn’t trust the banks," said Carey, who keeps her savings at credit unions. "I’d be afraid of them. Look at the money they gave to the builders and the terrible situation we’re in now."

It isn’t easy for retail depositors such as Carey to move funds abroad. In Ireland, there has been some shift to units of foreign banks operating in the country. RaboDirect, the Irish online-banking unit of Utrecht, Netherlands-based Rabobank Group, saw deposits rise about 40 percent in 18 months, according to General Manager Roel van Veggel.

Tax AvoidanceWhile the implosion of Irish banks led the government to seek an EU bailout, in Greece the state’s finances collapsed first. Now Greek lenders are feeling the pain because they own about 40 billion euros of their government’s sovereign debt. If they have to take losses of 40 percent or more on those bonds, it would wipe out all the capital held by the country’s banks, the European Commission estimated in July. Greek government bonds are already discounted by 60 percent in the secondary market, according to data compiled by Bloomberg.

In addition to fearing a drachma conversion, some affluent Greeks are moving money out of the country to avoid having their bank accounts become targets for tax collectors, said Antonio Ramirez, an analyst at KBW Inc. in London. "As the government starts looking for revenue, starts fighting tax evasion, wealthy families move their money out," said Ramirez, who covers Greek, Irish and Portuguese banks.

That dynamic is also at work in Italy, according to Carlo Alberto Carnevale-Maffe, a professor of business strategy at Milan’s Bocconi University. Deposits at Milan-based Intesa Sanpaolo SpA, Italy’s second-biggest bank by assets, fell 4.4 percent in the year ended in June.

‘Under the Mattress’"People are moving deposits into safe goods such as gold and safety-deposit boxes," Carnevale-Maffe said. "They’re simply putting the money under the mattress to avoid taxes." Intesa CEO Corrado Passera said on an Aug. 5 call that the decline was the result of a decision to discontinue some institutional funding and the sale of retail bonds. "In terms of flight to quality, no, I must tell you that we are not experiencing in our country anything like that," Passera said.

European lenders are also moving money out of the region. The cash that foreign banks keep at the U.S. Federal Reserve has more than doubled to $979 billion at the end of August from $443 billion at the end of February, according to Fed data. The increase in bank deposits at the ECB has been smaller, suggesting that healthy European firms are putting money in the Fed instead of lending to weaker banks, according to economist Mansori, who also writes a blog called "Street Light."

Bank Lending"Do you want to keep your money at the Fed, which you know will pay you back, or at the ECB, which has lots of periphery euro zone country debt?" said Mansori.

The reluctance of European banks to lend to one another has been on display since last month. The spread between Euribor and the overnight indexed swap rate, which reflects the higher risk of lending euros for three months versus overnight, widened to 0.85 percentage point on Sept. 13. The rate compares with 0.36 percentage point at the beginning of August.

Banks can’t continue to rely on the ECB for funding because that’s a sign of being on "life support," so they’ll have to shrink their balance sheets, said KBW’s Ramirez. That means reduced lending in countries where growth is stagnant.

Lending by banks in Ireland declined 9 percent in the past year, 3 percent in Greece and Italy and about 1 percent in Portugal and Spain, according to ECB data. Gross domestic product in Italy expanded 0.8 percent in the second quarter from a year ago and 0.7 percent in Spain. Greece’s economy shrank 7.3 percent, while Portugal’s contracted by 0.9 percent. Irish GDP growth was 0.1 percent in the first quarter, according to the latest data available.

Irish CutbacksIreland said in March that its surviving banks would wind down more than 70 billion euros of loans. Most of the reduction will be lending to borrowers outside Ireland, which could hurt growth in other EU countries. Greek banks, unable to sell sovereign bonds they hold, will also have to trim their loan books, according to Ramirez. "It’ll aggravate the recession," he said.

While banks say higher capital requirements will curb lending and economic growth, it’s the lack of capital in the European banking system that’s spooking depositors and other creditors, said Lachman of the American Enterprise Institute. That’s why the International Monetary Fund is pushing for recapitalization of the region’s banks, he said.

Paying more for deposits to prevent them from leaving, as banks in Ireland, Spain and Portugal are doing, will hurt banks’ chances of rebuilding capital through earnings. Offering higher interest rates for retail bonds as Italian lenders have done will cut into interest margins.

‘Not Sustainable’"It’s not sustainable for this type of pricing strategy to continue," Rabobank’s Van Veggel said about the high rates Irish banks are offering for deposits. "But I don’t think rates will start to come down until nervousness about European, and indeed global, issues calm down."

German and French banks are losing funds because they hold the most debt linked to troubled euro zone countries, according to Mark Schaltuper, an analyst at Business Monitor International, a London-based consulting group. Investors and creditors worry that German and French lenders will face losses on their holdings in the event of a default, he said.

"European policy makers are kicking the can down the road, waiting for banks to recapitalize slowly so they can take these losses over time," said Schaltuper, the firm’s chief European analyst. "Until the debt situation in the periphery is sorted out, these funding troubles won’t end."

Europe's struggle to come good on pledges to rescue Greece from bankruptcy and save its single currency has descended into confusion amid political feuding and parliamentary setbacks across the eurozone.

Angela Merkel's coalition in Germany faced rows about whether Greece should be allowed to fail; a parliamentary committee in Austria delayed a vote to ratify plans for a stronger bailout fund; and Slovakia's Eurosceptic parliamentary speaker demanded that Greece be allowed to go bust, making clear that he would seek to undermine the plan hatched at a eurozone summit in July in Brussels.

Amid the cacophony, José Manuel Barroso, head of the European commission, voiced exasperation at the failure of EU national leaders to keep their promises and talked up the benefits of eurobonds, a pooling of eurozone government debt.

The Polish finance minister said the survival of the EU was at stake. "Europe is in danger," Jacek Rostowski told the European parliament in Strasbourg. "If the euro area breaks up, the European Union will not be able to survive." Poland currently holds the EU presidency and Rostowski faces a tough challenge on Friday when he chairs a meeting of EU finance ministers in Wroclaw which will now be consumed by the crisis.

International pressure on Merkel and other European leaders surged, with the US, China, Russia and others demanding they get a grip. In a display of Washington's alarm, the US Treasury secretary, Timothy Geithner, is to take part in the Wroclaw meetings .

The American fear is that a Greek collapse would trigger a renewed European banking crisis which would spill over into the US, a reverse of what happened in 2008, when the collapse of Lehman Brothers was exported across the Atlantic. A fresh crisis could plunge America back into recession and damage Barack Obama's re-election hopes. The US markets reacted to the news from Europe with another jittery day., but the Dow Jones Industrial Average closed up more than 140 points having fallen more than a 100 earlier in the day.

Damon Vickers, a Seattle-based hedge fund manager, said the jitters were likely to continue. "This is anxiousness, fear, it's 2008 all over again. That crisis was about banks and the consumer, this is about countries," he said. "The sooner we get this over with the better, then we can move on," he said.

John Canally, economist and investment strategist at LPL Financial, said investors were torn between the "fear that we are going to see a collapse in the euro and a country is going to fail and the belief that everything is going to be OK." He said all eyes were now on the meeting of European finance ministers this Friday and the US Federal Reserve next week. "The markets want to see a bold policy move in Europe," he said. "If they don't see that, this will continue."

Similar fears are gripping the Elysée Palace in Paris. A Greek collapse would impact severely on French banks eight months before Nicolas Sarkozy faces a second-term presidential election.

Another leader under pressure, Italian prime minister Silvio Berlusconi, has won a vote of confidence, paving the way for his austerity package to be voted through. The governing coalition has been fighting over the details of the fiscal consolidation plan for weeks but Berlusconi mustered enough of a majority to win the vote.

At a teleconference Greek prime minister George Papandreou told Merkel and Sarkozy his country was determined to meet all obligations agreed with international lenders in exchange for an EU/IMF bailout. All three leaders have a vested interest in playing for time over Greece despite the sense that it is running out. "The president and the prime minister have repeated in unison France's determination to do whatever it takes to rescue Greece," said the French government spokeswoman, Valérie Pécresse.

Officials from the European commission, European Central Bank (ECB) and the International Monetary Fund returned to Athens to try to get the Greek rescue package back on track. According to senior EU diplomats, this month the three officials departed from Athens "in despair" at the Greek government's failure to honour the stiff terms of the bailout deal.

In July, eurozone leaders pledged a second €109bn bailout for Greece, to increase the bailout pot, the European Financial Stability Facility, and to empower it to replace the European Central Bank (ECB) in buying up stricken government bonds.

But the plans have run into problems. The level of involvement by Greece's private creditors in rolling over debt remains lower than foreseen. The 17 countries of the eurozone have to ratify the new scheme promptly, but ratification has been delayed in Austria, Slovakia, Finland and possibly Slovenia, and run into rebellion among Merkel's coalition partners.

While Barroso talked up the prospect of eurobonds on Wednesday, Germany's economics minister and liberals' leader, Philipp Rösler, ruled them out. Pécresse in Paris said there would not be a quick fix. "Eurobonds are for us the end of a process of consolidation in the eurozone because sharing debt also requires the convergence of our budget policies."

In Bratislava, Richard Sulík, the Eurosceptic speaker of parliament and leader of one of four parties in the ruling coalition, said the bailout fund was a bigger threat to the euro than Greece. "It has often happened that a city within a country goes bankrupt, and that does not have consequences for the currency. We must let Greece go into bankruptcy," he told Austrian radio. "The rescue plan tries to overcome the debt crisis with new debt. We are saying that this is equally a threat to the euro."

That echoed growing calls among political leaders across eurozone creditor countries. The Dutch prime minister, Mark Rutte, was the first eurozone head of government formally to propose recently new arrangements enabling fiscal recalcitrants to be expelled from the single currency. Barroso said: "Solid, feasible and concrete proposals have been made and agreed upon. But they have taken too long and have not yet been fully delivered."

The European Central Bank has lent $575m to eurozone banks in the first use of its dollar facility for a month. In the latest sign of escalating eurozone bank tensions, the ECB said two bidders had taken advantage of the weekly offer of dollar liquidity it operates with the US Federal Reserve without naming the banks involved.

Because the 1.1 per cent interest rate charged was higher than that paid by banks in commercial markets, the facility’s use indicated two banks were having difficulty obtaining sufficient dollars. US investors have withdrawn funding from the eurozone amid worries about the region’s escalating debt crisis.

Questions have been asked about the funding needs of France’s largest banks over the summer because of their exposure to Greek sovereign debt and the risk of a possible downgrade by Moody’s, the credit rating agency. Moody’s made that move on Thursday.

But the sums borrowed remained low compared to the overall size of ECB liquidity operations, suggesting the problems remained specific rather than general. However, banks may have been put off applying for dollars because of the possible stigma attached to tapping the ECB, even though no details are revealed about banks’ borrowings.

The ECB is monitoring the rising costs that eurozone banks’ face in obtaining dollars, and has left open the possibility of improving access to its supplies of the US currency. In June, when announcing that offers of weekly dollar liquidity would continue, the ECB said it would "keep the necessity, frequency and maturity of its US dollar repo operations under review".

The ECB announcement came as BNP Paribas revealed plans to reduce its dollar funding needs by $60bn. France’s biggest bank by market capitalisation said it would sell assets to reduce its balance sheet by about 10 per cent by the end of next year. The bank on Wednesday denied a media report that it had problems with dollar funding and said it had access to funding lines "in the normal course of business" either directly or through swaps.

Earlier this week Société Générale promised to raise €4bn by 2013 through business asset disposals as it battled to contain falls in its share price which have lost a third of their value in the past month. Acting with the US Fed, the ECB first offered US dollars to eurozone banks at the end of 2007. The programme was reactivated after the collapse of Lehman Brothers in late-2008 – and in May last year, when the eurozone debt crisis was at its most intense.

On Wednesday, the ECB again offered banks dollar liquidity. The $575m drawn compares with the $500m borrowed by a single bidder under the facility on August 17 but remains modest in comparison with the amount – up to $10bn – that was borrowed weekly in May 2010.

UBS shocked investors on Thursday with news that it had discovered a potential $2bn loss due to unauthorised trading at its investment bank. The Swiss group gave no further details, other than saying the loss had been caused by "a trader" and the matter was under investigation. It warned the discovery could prompt it to report an overall loss for the group when third-quarter figures are revealed in October.

"It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected," the group said in a statement. UBS officials could not identify in which area of the investment bank the unauthorised trades occurred, when they had taken place, or when more information might become available. "For the time being, we have nothing to add", said a spokesman.

The loss will inevitably recall the €4.9bn loss caused to Société Générale by Jerôme Kerviel, a relatively junior trader in its investment bank, which caused the French group to wobble, and the actions of "rogue trader" Nick Leeson at Barings.

The revelation will inevitably prompt, and probably reinforce, calls from some investors and many Swiss politicians for a downgrading – or even outright closure – of UBS’s investment banking activities. The group wrote off more than $50bn in the credit crunch on toxic paper, plunging it into heavy loss. Staffing at the investment bank, the cause of the problem, was severely reduced, amid frequent changes of management.

Some stability has returned at the unit under Carsten Kengeter, the former Goldman Sachs executive hired to restore order. But in spite of significant hiring to rebuild numbers and morale, the group has so far largely failed to convince investors about the viability of much of its investment banking operations.

Some Swiss politicians, still angered by the state bail-out of UBS in late 2008, are likely to take the latest news as "proof" the bank should quit investment banking and focus exclusively on its less risky private banking and fund management activities. The news will also prompt doubts about Oswald Grübel, the veteran Credit Suisse chief executive who came out of retirement in February 2009 to head UBS.

Mr Grübel has been highly effective in turning around the group, which was one of the biggest casualties of the credit crunch. But, as a very much "hands on" manager and a former trader himself with an acknowledged "nose" for the markets, Thursday’s revelation will be particularly unwelcome. Shares in UBS, already battered by the lack of confidence in bank stocks, fell by as much as 8.51 per cent to SFr10.00 in early Zurich trading.

The news comes after UBS last month said that it would shed 3,500 jobs as part of a sweeping cost-cutting programme aimed at reshaping its business for a much tougher climate, particularly within its struggling investment banking division. The job cuts, which total about 5 per cent of UBS’s global workforce, were signalled in last month’s dismal second-quarter results, when chief executive Oswald Grübel scrapped a group profit target of SFr15bn.

Almost half of the reductions will be made in the investment bank as UBS focuses on developing its flagship wealth management arm in fast-growing markets, while scaling back efforts to rebuild sales and trading operations battered by the financial crisis.

The news that a "rogue trader" (I hate that term – more on that in a moment) has soaked the Swiss banking giant UBS for $2 billion has rocked the international financial community and threatened to drive a stake through any chance Europe had of averting economic disaster. There is much hand-wringing in the financial press today as the UBS incident has reminded the whole world that all of the banks were almost certainly lying their asses off over the last three years, when they all pledged to pull back from risky prop trading. Here’s how the WSJ put it:

The Swiss banking giant has been struggling to rebuild trust after running up vast losses in the original financial crisis. Under Chief Executive Oswald Grubel, the bank claimed to have put in place new risk management practices, pulled back from proprietary trading and focused on a low-risk client-driven model.

All the troubled banks, remember, made similar promises in the wake of the financial crisis. In fact, some of them used the exact same language. Some will recall Goldman’s executive summary from earlier this year in which the bank pledged to respond to a "challenging period" in its history by making changes.

"We reviewed the governance, standards and practices of certain of our firmwide operating committees," the bank wrote, "to ensure their focus on client service, business standards and practices and reputational risk management."

But the reality is, the brains of investment bankers by nature are not wired for "client-based" thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking – historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there – turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you’re not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you’ve cooked up, then you won’t make it on today’s Wall Street.

Nonetheless, thanks to the Gramm-Leach-Bliley Act passed in 1998 with the help of Bob Rubin, Larry Summers, Bill Clinton, Alan Greenspan, Phil Gramm and a host of other short-sighted politicians, we now have a situation where trillions in federally-insured commercial bank deposits have been wedded at the end of a shotgun to exactly such career investment bankers from places like Salomon Brothers (now part of Citi), Merrill Lynch (Bank of America), Bear Stearns (Chase), and so on.

These marriages have been a disaster. The influx of i-banking types into the once-boring worlds of commercial bank accounts, home mortgages, and consumer credit has helped turn every part of the financial universe into a casino. That’s why I can’t stand the term "rogue trader," which is always tossed out there when some investment-banker asshole loses a billion dollars betting with someone else’s money.

They’re not "rogue" for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys "rogue traders" when they make a billion dollars gambling.

The only thing that differentiates a "rogue" trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG’s Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn’t an investment banker, technically – but he was in financial services).

In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

There is a movement in the UK for a thing called “ringfencing” that would separate investment bankers from commercial bankers. Some people think this UBS incident will aid that movement, even though UBS can apparently absorb the loss without necessitating a bailout or endangering client accounts.

The U.S. missed its own chance for ringfencing when a proposal for a full repeal of Gramm-Leach-Bliley was routed during the Dodd-Frank negotiations.

That means we’re probably stuck here in the states with companies like Bank of America, JP Morgan Chase and Citigroup, giant commercial banks in charge of stewarding trillions in client bank accounts and consumer credit accounts who also behave like turbocharged gamblers via their investment banking arms.

Sooner or later, this is going to blow up in our faces, and it won't be one lower-level guy with a $2 billion loss we'll be swallowing. It'll be the CEO of another rogue firm like Lehman Brothers, and it'll cost us trillions, not billions.

Household debt levels have reached a new high, increasing the vulnerability of average Canadians to unexpected economic shocks just at a time when uncertainty is mounting.

Despite signs that Canada’s economic recovery is fizzling, data released by Statistics Canada Tuesday shows that the ratio of credit market debt to personal disposable income climbed to 148.7 per cent in the second quarter, surpassing the previous record of 147.3 per cent set in the first three months of this year.

Driven mostly by an uptick in consumer credit and mortgage borrowing amidst bargain basement interest rates, economists say the increase could have significant consequences for the household balance sheet no matter which way the economic winds blow. "Anytime the [debt-to-income] ratio rises -- and I think there’s full recognition that it’s already very high -- that increases the vulnerability to the household from a medium-term perspective to unanticipated surprises, like an interest rate hike or weakness on the job market," says Derek Burleton, deputy chief economist for TD Bank.

But with record-low interest rates expected to persist for some time to come, Burleton says it’s likely that Canadians will continue to spend beyond their means. "When I look ahead, I do think the ratio is going to move higher before it goes lower," says Burleton. Adding to the concern is the extent to which the arguably overvalued housing market is making consumers feel wealthier than they truly are.

"It may well be that the housing price bubble continues to be fueled by low interest rates, but those low interest rates are being driven by poor economics," says David Macdonald, a research associate at the Canadian Centre for Policy Alternatives. "So consumers are digging a bigger hole for themselves at the same time as their employment prospects are weaker."

According to Statistics Canada, among "non-financial assets," residential real estate accounted for over half of the 1.2 per cent increase in national net worth during this period. And as Canadians sink ever deeper into debt, their ability to pay their bills is becoming more strained. Per capita household net worth -- the value of households’ assets minus their debt -- fell from $185,500 in the first quarter to $184,300, the first drop since the second quarter of 2010.

Statscan attributed that drop to the falling stock market, which has shaved some 5.9 per cent off household equity. Not everyone, however, is sounding the alarm bells. Characterizing the housing market as "fundamentally sound," Royal Bank of Canada economist David Onyett-Jeffries told The Wall Street Journal that Canadians have accumulated debt much more gradually than in the U.S. Though he concedes that growing debt levels should "definitely remain on the risk radar," he says, "We’re not in the mindset that it’s a perilous position."

But as Macdonald sees it, artificially inflated housing prices are currently masking the severity of the debt problem. "It’s like you have one disease that causes you to lose too much weight, but you have another disease that causes you too gain to much weight, so you’re sort of OK," he says. "But in the end, you have these two diseases."

The day of reckoning, he says, will come when recovery resumes in earnest. "If and when the economy in Canada does start to pick up and starts to put pressure on interest rates, then we’ll see personal debt -- most of that being housing debt through mortgages -- be a real drag on economic growth," he says. "Long term, it’s not a stable situation."

Spain today plans to sell as much as 4 billion euros ($5.5 billion) of bonds, two days after Italy’s borrowing costs surged at a bill auction and as Greece’s slide toward a possible default roils global markets. "Lower demand is likely to push up rates as systemic risk dominates the markets," said Fadi Zaher, a fixed-income strategist at Barclays Wealth in London. "The European Central Bank credit card is running out, the involvement of private investors in Greece remains hanging in the air and euro-zone leaders are showing no unity."

The Treasury is selling bonds maturing in 2019 and 2020 as the premium investors demand to buy Spain’s debt rather than German equivalents narrowed to 351 basis points today from 359 basis points on Sept. 13. The ECB intervened on the secondary markets on Aug. 8 to stem surging Spanish and Italian borrowing costs. The yield on Spain’s benchmark 10-year bond reached a 6.3 percent euro-era high on July 18. Results for today’s auction are due about 10:45 a.m. Madrid time.

Finance Minister Elena Salgado said yesterday that Spain’s interest-cost burden is one of the lowest in Europe. Prime Minister Jose Luis Rodriguez Zapatero is struggling to cut a budget deficit that’s three times the European Union limit and dodge a bailout. Divisions among European leaders on aiding Greece and helping Spain and Italy avoid being engulfed by the debt crisis are sapping demand for bonds in the region. Greek Prime Minister George Papandreou’s latest offer of increased austerity is failing to convince investors the country can meet its fiscal targets and avoid a default.

Advancing YieldsItaly’s Treasury sold 3.9 billion euros of five-year bonds on Sept. 13, with yields rising to 5.6 percent compared with 4.93 percent when similar-maturity securities were sold on July 14. The Treasury fell short of its maximum target of 7 billion euros as demand was 1.28 times the amount offered, down from 1.93 times at the last sale.

The yield on Greece’s two-year note surged to a record 77 percent yesterday, while the cost of insuring Greek, French, Spanish and Italian debt against a default surged. The yield on Spain’s benchmark 10-year bond climbed to 5.37 percent today compared with 5.08 percent the day after the ECB started buying Spanish debt.

Spanish banks’ borrowings from the ECB surged to 69.9 billion euros in August, an 11-month high, from 52.05 billion euros in July, the Bank of Spain said yesterday. Divisions among European governments over how to tackle the region’s debt crisis have helped drive up banks’ borrowing costs, narrowing their access to the wholesale debt markets they need to fund their business.

Fitch rates Spain AA+ with a "negative" outlook, and Renwick said weaker growth, failure to meet deficit targets or larger-than-forecast use of public funds to rescue banks could be "clear triggers for the rating." Moody’s Investors Service has an Aa2 rating on Spain and Standard & Poor’s rates it AA.

Zapatero said yesterday that market tension may affect the government’s growth forecast. Still, he expects quarterly growth rates in the third and fourth quarters to be "similar" to the 0.2 percent expansion in the three months through June.

Spain's Treasury sold almost 4 billion euros (3.45 billion pounds) of three bonds on Thursday but paid dearly, even with the support of the European Central Bank, as euro zone leaders struggle to tackle Greece's debt problems. The Treasury sold 1 billion euros worth of a 2019 bond and 1.4 billion and 1.5 billion euros of two bonds maturing in April and October 2020, respectively. The amount sold was at the top end of the Treasury's target of 3 to 4 billion euros, but yields were close to their highest levels since 2002.

The sales come before euro zone finance ministers meet in Poland on Friday to try yet again to draw a line under the Greek crisis that has hit global markets and sent borrowing costs in countries like Spain and Italy to record highs.

The results showed there is no let-up for weaker periphery euro zone countries, after a five-year debt auction in Italy on Tuesday saw its borrowing costs jump to record highs. "This was nothing spectacular. But the way the background risk is and Greece's fate on a bit of a knife edge, it's the best Spain can expect right now," said Jo Tomkins, analyst at consultancy 4Cast.

Separately, core euro zone country France, under pressure after bank rating downgrades this week, sold 8.5 billion euros in bonds, though demand was weaker than at previous auctions.Despite ongoing support from the ECB in buying periphery debt, Spain too paid dearly, with yields on all the bonds near or above 5 percent. The average yield on the 2019 bond was 4.969 percent. On the April 2020 bond it was 5.006 percent, and for the October 2020 bond it was 5.156 percent. All were last sold between April 2009 and December last year.

ECB HandThe outcome could have been a lot worse without the support of the ECB, which has bought roughly 70 billion euros of periphery debt in the last five weeks in a bid to stop the crisis worsening for Spain and Italy. Borrowing costs jumped to euro-era record highs in August, with the yield on Spain's benchmark bond spiking to 6.3 percent. On Thursday it was trading around 5.3 percent.

"It's encouraging they were able to exhaust the range, something which Italy was not able to do on Tuesday. (But average yields) are at uncomfortable territory ... It would be much better to get them lower, and they are ECB-influenced so it's as good as it gets," said David Schnautz, strategist at Commerzbank.

Analysts say Spain will be able to keep financing at those levels, but if borrowing costs on 10-year debt were to rise as high as 7 percent, then the country would eventually need a bailout like Portugal or Ireland. The Treasury saw reasonable demand for the bonds. The bid-to-cover ratio, an indicator of investor demand, was 2.2 on the 2019 bond. It was 2.0 on both of the bonds maturing in 2020.

With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.

The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels. "Jobs like these have kept this city alive," said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. "You see, here we are at the bar, we support the economy this way."

But what may be saving Comitini’s economy is precisely what is strangling Italy’s and other ailing economies throughout Europe. Public spending has driven up the public debt to 120 percent of gross domestic product, the highest percentage in the euro zone after Greece’s. In recent weeks, concerns about Italy’s solvency and the shaky finances of other deeply indebted European nations have sapped market confidence and spread fears about the stability of the euro itself.

On Wednesday, Italy’s lower house of Parliament gave final passage to a $74 billion austerity package aimed at eliminating Italy’s budget deficit by 2013. But analysts doubt that the measures — primarily tax increases but also cuts in aid to local governments, a higher retirement age for women in the private sector and a change in Italy’s labor law to make it easier for companies to hire and fire — will achieve the advertised savings.

Many of the cuts in financing for local governments may yet be bargained away in annual budget negotiations to be held this year, and nowhere in the legislation are there any measures to reduce the salaries or the number of public sector employees, more than 80 percent of whom have lifetime tenure. But they would lose some retirement benefits, and a hiring freeze is already in place.

Financial markets have remained edgy, with yields on Italian bonds rising to a record high of 5.7 percent at auction this week, before rallying a bit after the government passed a confidence vote on the austerity measures. Investors remain unconvinced, though, fearing a possible downgrading of Italy’s credit rating, which could further drag down the euro, and there is already talk of the government introducing additional austerity measures.

"I have great doubts about whether they’re sufficient," Stefano Micossi, an economist and the director of Assonime, an Italian business research group, said of the austerity package. "The mechanisms that led to such spending haven’t changed." The sticking point, he added, was the public sector. "The big problem is the public administration," he said. "It’s inefficient and corrupt. But corruption is born in politics and politicians don’t want to change."

Italy is contending with a public debt, built up under a succession of Christian Democratic governments, that helped the country emerge from dire poverty after World War II to become Europe’s third-largest industrial economy. Especially in the poorer Italian south, the Christian Democrats put millions of people on the state payroll in a jobs-for-votes system that many say has persisted under Prime Minister Silvio Berlusconi. The quid pro quo worked so long as the economy was expanding, but now is seen as one of the major threats to Italy’s solvency.

In 2009, the most recent year for which data is available, an estimated 3.5 million Italians were on the state payroll out of a work force of 23 million, according to the Ministry for the Public Administration and Innovation. On Mr. Berlusconi’s watch, government expenditures — including the cost of public administration and defense — rose to more than $1 trillion in 2010 from $753 billion in 2000.

Analysts attribute some of the rise to the introduction of the euro in 2001 and the rising cost of pension spending in a nation that will soon have more retirees than workers, as well as to soaring health care costs. But they say it also stems from deals Mr. Berlusconi has made with powerful politicians from both the north and the south to get the votes needed to hold together his government.

Those votes mean the government is loath to stop the flow of money. Even with the new austerity measures, "They haven’t closed the taps," Mr. Micossi said. Some say the jobs-for-votes mentality derives from Italy’s feudal heritage. Italy was a patchwork of warring fiefs before unification 150 years ago, and personal networks are often still seen as more powerful than institutions.

Even today, the concept is: "I understand the state if it gives a benefit to my person, family, business," said Luigi Musella, a historian at the University of Naples and the author of "Clientelism," about Italy’s quid pro quo politics.

For his part, Nino Contino, the mayor of Comitini since 2002, is proud that he has used public money to create jobs. "I know that 60 people in a town of 1,000 is a good number, it’s a lot," Mr. Contino, 49, said of his city’s employees. "But if I didn’t let them work, these people would have to go work in America. That’s 60 people with 60 families looking for work elsewhere."

"Besides," he added, "the city doesn’t pay them. The state and the region do." Indeed, Comitini’s city employees are paid 90 percent by the regional government and 10 percent by the town. "This town lacks for nothing," Mr. Contino added, as he showed off the town’s library, with a children’s play area and an extensive collection of Sicilian history books, including a rare 10-volume set of the "History of Feudalism."

Upstairs, a small museum featured Arab-Norman pottery fragments and an exhibition on the nearby sulfur mines that employed as many as 10,000 people before they closed in the 1950s and 1960s, forcing many residents to retire early and others to emigrate.

Beyond its 960 residents, the town counts 3,000 emigrants registered to vote there, said Mr. Contino, whose main job is as a specialist in cellulite reduction. Some residents are concerned that the new austerity measures mean that money for local employees might dry up. But Mr. Contino said he was not worried. "I don’t think that’s a risk. Here, there’s a culture of maintaining jobs," he said. "Political will here is relative," he added.

Yet the cuts to regional spending in the austerity measures are real, even if changes to local government will likely take years to apply. "We can’t touch salaries," Raffaele Lombardo, the president of the Region of Sicily, said in a telephone interview, "But now it’s certain that hiring will be blocked for many years."

Back in Comitini, residents began to gather in the main piazza. A city council member was getting married in the church. Cars stopped and parked beneath a "no parking" sign while their drivers hopped out for a coffee in the bar. Inside, Ms. Valenti and her colleagues said they were not much inclined to give parking tickets. "We try to avoid giving fines," she said. "It’s a small town, we all know one another."

99 comments:

TAE has stated that the only solid currency before the bond collapse is the USD.The Candian dollar for now seems to be close to par but it feel like it might drop and I dont know to what levels it will go down to.Also the Canadian economy is tied closely to the USA so if it went dowm below the USA that would have negative impact on the trade so I am saying the USA would not let the Canadian dollar go below.To sum up my sentence I am wondering if I should convert all my Canadian dollar now or later.Thanks

On the whole it makes sense to hold your own currency. I think the USD will be stronger for quite a while, but you take currency risk holding other currencies. You might not be able to covert back to something you can use as easily later as you could now.

The Canadian dollar is at least partly linked to the value of oil and other commodities. I think these will fall in value. The Canadian branch-plant economy will also take a big hit as demand for its products evaporates and any remaining jobs end up repatriated to the US for political reasons. Canada is facing some very major problems, but the prevailing level of complacency is unbelievably high, and that prevents preparation for the inevitable.

So am I supposed to assume Evans-Pritchard's analysis of import/export relationships is good...but perhaps his analysis/prediction of UST rates is not so good: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100011987/china-to-liquidate-us-treasuries-not-dollars/

I didn't see what actually occurred with the comments, but from what I gathered, there are some impersonators about.

I really hope that something can be done about the comments other than shutting them down. I don't comment here frequently, but beyond the various posts, the comments here are most valuable. Leaving them closed lets those who wish to disrupt win. I'd almost suggest leaving them open. Those who frequent the site will know who the pretenders and troublemakers are and will ignore, but don't let them rob the rest of us of the rich discussion here

The problem we had was that several posters were impersonated, and by someone who worked to copy a style while still trying to undermine TAE. While the comments made as us were obvious forgeries, the one made as other posters were harder to spot.

This problem will go away once we move over to the new version of our site that we're working on. In the meantime we need to be vigilant, and we don't always have time to be.

I very much value the comments and commenters as well . Hopefully the disruption won't last too long.

"Heading Out" (David Summers) has been posting updates on possible eruption of the Icelandic volcano Katla on his site "Bit Tooth Energy". Katla often erupts after Eyjafjallajokul which erupted last summer:

Timmy is at the EU meeting explaining his plan, (how they can have a better program than the Fed + F&F rolled up into one to absorb all the bad debts), and he is recommending that the new fund, (EU bond), be leveraged to infinity to solve the EU financial problem. Of course, If the rules and laws of yesterday, are an impediment, then change the rules and the laws. He want the EU to set up The EU bond structure in the CLOUD and be leveraged as needed. This way, everyone will be saved!

He is finding that not everyone is agreeing with his solution, “Conflict is very damaging”, he says.

Printing, leverage, forgiveness of debts, by the “CLOUDS”, (virtual entities), will be the new reality.jal

"So am I supposed to assume Evans-Pritchard's analysis of import/export relationships is good"

No, because AEP didn't have an analysis on the import/export relationship. I merely used his factual statements to support my argument on that relationship. In fact, his article on UST rates actually implies he doesn't understand the relationship. It's one thing to actively bail out competitive net exporters in Europe, and an entirely different thing to actively destroy your biggest consumer base (the US).

The discussion around the $CDN caught my attention, and I wanted to advance that discussion further - perhaps this history of the CDN dollar from CBC may be of interest?

http://www.cbc.ca/news/interactives/map-history-dollar/

What worries me is that the $CDN is at all-time highs since 1950. A return to the levels of '98 or '02 would see a 56% decline (if my math is correct?) of the purchasing power of the $CDN.

Given that risk, I assume there is some wisdom in at least converting a modest amount of one's $CDN into $USD? This has been one my primary driver in choosing to convert approximately 10% of my meager holdings from $CDN into $USD.

In the financial press you're called a "rogue trader" if you're some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

Well-I've been called a troll almost every time i post here-Not sure why an opposing opinion brings out the troll callers-but it does-If someone is trying to undermine or just be disruptive-then yes they are a troll-on the other hand some people do have a different opinion and if we want to live in a world of free speech-then opposing view points must be allowed-*********Avoid Gold, Silver; Buy DollarsContrary to what most analysts are recommending, Dent advises staying cautious on gold and silver, and stocking up on U.S. dollars. "I think gold and silver are a bubble. It's the most dangerous place to be," Dent said. ********Dent called DOW 36,000 just before deflation inserted itself-

I agree-buy USD's and be careful of silver and be very afraid if you have no gold-or live in a country that holds no gold reserves-like Canada-Short the CAD-

My point about calling everyone who has a different opinion (especially about gold) on the AE trolls-is that it gets to be a bit overused-

If you live in Canada-buying USD's is shorting the CAD-i would not recommend inexperienced people directly short it-because it is dangerous-Remember when Canada sold off its gold?The CAD dropped to 62 cents-

It depends on which side you choose to be on and what timeframe you're talking. I would agree that the CAD probably won't get too much higher vs the USD. But vs the Euro it very well might.

The demand for USD is set to rise once debts start to need to be paid back for real. The CAD will probably lose some vs it, but I don't see it giving up all that much in the short term: no 50% or something, unless the real estate market suddenly tanks. But vs most European currencies the opposite is probably true. It might well get to par with the Euro for example.

Unfortunately I'm not very well educated on FOREX, so perhaps you can help me out with one more question...

What is the benefit to me as a Canadian in being able to purchase Euros cheaply? I suppose should I want to travel there or purchase goods from EU nations I could see some benefit, but if I'm just trying to avoid a CAD collapse (as you said, it is probably unlikely unless there's a big real estate correction in Canada - which is something I worry about), shouldn't I just start making the move to USD now?

The total government (federal, provincial, and municipal) household, and business debt in Canada is 4662 billion$ (4.662 trillion $), and over the last 12 months it has gone up by 268.5 billion $, (roughly speaking because the household and business credit numbers are from the end of July 2010 to the end of July 2011 while the increase in the total government (gross) debt number is from the end of June 2010 to the end of June 2011)

I think for the Governments of Canada and the Bank of Canada to let the total debt in this country increase by 268.5 billion $ in the last 12 months is proof beyond a shadow of a doubt that the great borrowing and spending binge that has gone on in this country for the last 40 years is running on fumes, and they are very fearful of what the future may bring.

Our whole way of life in this country is a big lie and about to come crashing down around our ears.

The one thing I can't figure out though is why are the lenders still lending all of this money. Clearly the debt numbers in this country (and in the rest of the so-called western world) are astronomical and there is no possible way that the folks doing all of this lending are going to get anywhere near all of their money back, and if they do get their money back the value of it will be severely debased by all of the money printing that is going on.

I think the great party ends when the bond markets of the "stronger" (relatively speaking) western world countries finally figure out that they indeed will not be getting all of the money they have lent out back (or if they do get it back the value of it will be severely debased), and start to sell off their bond holdings thus driving bond yields (interest rates) through the roof.

Officials said Geithner was coming to propose how the region might try leveraging its emergency bailout fund -- the 440 billion euro European Financial Stability Facility -- to better tackle the crisis, much as the United States used leverage to handle the fallout from the subprime collapse.

"We can always discuss with our American colleagues. I'd like to hear how the United States will reduce its deficits ... and its debts," Belgian Finance Minister Didier Reynders said somewhat tartly.Jean-Claude Juncker, the chairman of the Eurogroup, was even more to the point.

"I don't think it would be wise for me to report from an informal meeting that we have with the treasury secretary. We are not discussing the expansion or increase of the EFSF with a non-member of the euro area," he said.

If Bernanke is still intent to try to levitate the stock market, then I think that Rosie has it right. If they have decided to "pull the plug," then the big surprise will be the sound of silence. I figure the Fed will pull the plug when the PD's are out and have their naked shorts in place, and the pension funds and the dumb money are holding that big bag of dog crap. Of course, the diminishing returns on whatever he does is growing vastly, so he is also risking that some 15 year old quant on Wall Street hollering out, "Who is that man behind the curtain!"

Every "1st world" country is leveraged way beyond any possibility of "correction".

Every "developing country" (2nd world) is entirely dependent on the 1st world countries prosperity for their economic existence.

Every "3rd world" country is dependent on the first two in order to exist at all, (not really but we have successfully convinced them that they must roll over and conveniently die as needed).

I have no problem with TPTB pulling money out of there A$$, it's always been that way.

What I will never accept is that they can't possibly pull money out of thin air for the greater good, to educate the entire population about the concept of finite resources, to provide a place to live, birth to death health care, education, a place to live…etc.

I know….the response will be that somehow this is impossible to implement, we can not handle a peaceful existence, it will bring out the worst in us, BULL SHIT!!!

If you are so brainwashed that you don't SEE how humanity can and should find equilibrium then you are as F'ed up as the worst of TPTB that you all abhor.

Either we all exist on some level of humane equilibrium or we go DOWN hard and ugly. Don't kid yourself that you can hedge this hard cold fact. It's worse than chronic masturbation.

Not quite sure at whom your rant is directed, but I will take a wild stab.

Like everything else in the human universe, commenters here as well as the editors are divided in to two camps. One camp might be called the Utopian and the other, the Pragmatic. The Utopians would resent being labelled as such. The Pragmatics here also wish fervently that human beings would act more benevolently toward each other, particularly the MotU sociopaths who appear to be running the show. However, looking at the flow of history, the pragmatics say that the probability of this is small to zero, at least over the next 20 odd years. The Utopians then say, if you are not part of **our** solution, then you are part of the problem. The Pragmatics say that they would rather put their energy into helping people see the most probable outcome and how they might prepare for it. They tend to be Utopian on the most local level with people they know or should know. Preparations for an unlikely outcome in global economics could be a death sentence. The Pragmatics realize that the advice they give at best is a thin advantage to surviving the collapse, but something helpful is better than nothing.

There is an old saying, "You pay your money and you take your choice." In today's world neither is true. You have no choice and your money is being extorted. But one thing is sure to me. All politics is local. Changing the world has to start with your small community.

The Lost (almost) Technology of the Edison Cell---Here is something to read Complexity revealed

http://econintersect.com/wordpress/?p=12970 Why was the S&L Crisis not a Systemic Economic Crisis?Posted on 8 September 2011By William K. Black Sub title: S&L Crisis – Lessons Learned and Forgotten===http://econintersect.com/wordpress/?p=13044 Separating Casino Activities from BankingPosted on 9 September 2011---"Who's ready for the fall?"

http://cluborlov.blogspot.com/SUNDAY, AUGUST 21, 2011Reinventing Collapse in the US and Canada

by Justin Ritchie, The Tyee---http://www.extraenvironmentalist.com/Extraenvironmentalist

(In case you did not know, Extraenvironmentalist #13 speaks with Ashvin Pandurangi, writer for The Automatic Earth)

(I’m ready for everything and anything ... and ... I’ve got a bag of beans and a straw pea shooter in my emergency kit)jal

-Thanks for mentioning NiFe batteries, and at the right time as well, they look like they may go well with my winter project. (power for us people from the river)Was considering plain old lead/acid. -As well I was in a blue mood about sending to recycling a bunch of old VCR tapes that are no longer playable, and thought, 'gee if they get recycled that will just encourage more malinvestment, better to just bury them ... maybe some future denizen of this area will dig them up and use them for something useful like fishing lines, or strings for their bows'.

It gets frustrating to try to understand the European mess. As far as I can tell, the implosion is inevitable, unavoidable and necessary. And yet even those predicting collapse seem to be suggesting it COULD have been avoided with better policy decisions 12 to 18 months ago. That somehow the central banks dropped the ball last year to avoid this mess. As in this interview here:

And yet the part I don't understand is that this mess is 20+ years old. It's over 20 years worth of unsustainable standards of living supported by nothing but fake wealth (i.e., credit backed by nothing but more credit). So, how does ANY central bank make the right policy decision now? Or 12 months ago? Is it really true that a few deftly handled maneuvers last year could have solved all our problems? It's really hard to imagine. It's as though these economists are basing their presumptions on highly idealistic systems where human emotional behaviour has no impact at all. Except that is not the system we live in. Humans run the show, along with all that entails. I just don't see how these economisits can presume that politics won't get in the way of perfectly "logical" economic solutions. Maybe if we had no humans and all the decisions were coordinated by machines. But we live in a complex system run by herds of fallible organic animals, and I just see the momentum had to eventually towards the unavoidable, and the only thing central banks can do is try to forge a modicum of stability for a large population faced with a declining standard of living. I just don't see how any policy decision at ANY time could have made up for decades of poor planning and bad "human" behaviour.

Not that there are no problems re debt levels, but do you have any information about money printing in Canada. All I can see on the Bank of Canada website seems little to get excited about.

**********You are dealing with a sneaky Government run by a GS boy-

CMHC--

You can find the "Insurance-in-force" ($473 billion) and "Guarantees-in-force" ($300 billion)For 2009, which totals $773 billion. Their 2010 plan (also in that link) puts them at $915 billion for "in-force" amounts."

Stoneigh writesThe Canadian dollar is at least partly linked to the value of oil and other commodities. I think these will fall in value. The Canadian branch-plant economy will also take a big hit as demand for its products evaporates and any remaining jobs end up repatriated to the US for political reasons. Canada is facing some very major problems, but the prevailing level of complacency is unbelievably high, and that prevents preparation for the inevitable.

this is highly accurate as so much manufacturing has left ontario, most likely to never come back.heaven help us. as stoneleigh says we are collectively washing each others laundry.

also, something else in support of a strong canadian dollar is the upcoming housing collapse.as house values collapse the corresponding credit (mortgage) associated with house will collapse as well. this is the opposite of inflation and therefore is deflation. if the canadian money supply declines like this that means remaining canadian dollars will be worth more

. if the canadian money supply declines like this that means remaining canadian dollars will be worth more

*******They will certainly be more thinly spread but keep in mind they will continue to be devalued measured to CPI in sync with every other country-This is why there will be no hyper-inflation-currencies float and compete-All Central bank plans are pushed and pulled by the actions of other countries-Everyone wants the weakest currency-so they will all join the race to the bottom-Cash is good to hold though-for now at least-

Thanks for the mention about CMHC and, you bet they are sneaky, look what I got when I went to the link you gave:

"We apologize for the inconvenience but the page you requested cannot be found.

Do you have another link or could you give me the title of the page to look for?

Almost 2 years ago I wrote a 'damn your eyes' letter to Jim Flaherty about what the result of CMHC policy would be. Looks like he took no notice [LOL], but be assured that he can't now say 'nobody could have known' as this nobody did. Amazing what a person, or persons, will do for power!

------Hey Jack, I will be all eyes if/when Canadian housing begins to tank, till then I will hold Cdn$. For your interest here is the Bank of Canada site. Also, like Used mentions, keep an eye on how Canadian housing is faring, when it starts to go, get thirsty, till then I for one am merely eyeballs on the wall.

As a faithful lurker and seldom commenter, bugs me to see TAE threads messed with by jerks.

Anyway, I wonder if anybody here has some advice for moi .. Should I take the early-out retirement from my fed gov (library of congress) job currently being offered (with a 25k sweetener)?

I'm still a little young (58) to bow out of working altogether, but have enough years and pension savings to scrape by, thanks to my modest lifestyle and tiny super-cheap house .. I'm so burned out on the rat race, do have other skillz .. but does any of it matter? Aren't the bastards gonna crash and steal everything anyway? Including my lil' nest egg? Thanks for any wisdom ..

This statement from a "follow-up report" to the European "stress tests" may be instructive:

"The risk of a vicious circle between sovereign debt, bank funding and negative growth developments is therefore apparent now, at a time where the margin for maneuver is considerably more limited than in 2008-2009," the document said."

The rest of that Reuters article is about how the EU finance ministers agreed that European banks need to raise capital, even under the results of Europe's ridiculously conservative "stress test" in July. How on Earth those banks are going to raise that capital is another story, and one that inevitably involves taxpayers, workers, retirees, etc. But are the markets moving faster than the hand that feeds them, which is the same one groping around for loose change in your pocket?

Perhaps. The political climate around the world is nothing short of extreme. Even worse than the real climate. Obama can't avoid being mired in scandals of funneling taxpayer money to insolvent solar companies, let alone pass a twelve-figure jobs bill. Timmy "told" Europe to implement their own TARP-style bailout program, and the Germans and Austrians told him, in a somewhat roundabout way, to go screw himself. Chinese Premier Jiabao was asked to bail out Europe, and he told them what they told Timmy.

So now Ben is supposed to step in, twist the Treasury curve into a pretzel and pour hundreds of billions into asset markets next week, re-igniting the risk trade for another few months? Perhaps. Or perhaps the "margin for maneuver" is "considerably more limited" than it was last year, and the year before that. The sub-prime meltdown wasn't unexpected, and the global bailout mechanism wasn't either. But if there was ever a time to expect the unexpected, it is now.

Usanistan's best economic / political interviewer, Bonnie Faulkner, does a nice job with Michael Hudson in this week's interview on Guns & Butter.

"Debt Deflation in Europe and America" with Dr. Michael Hudson

Primarily focuses on the EMU and he gives a lot of direct answers, many of which to questions I was rather in the dark about. His viewpoint differs somewhat from I&S, but he is definitely one of the "good guys." The interview is actually a little dated, probably about two weeks old, though just posted a few days ago.

http://www.kpfa.org/archive/id/73344

@ used

I don't recall any other commenters claiming that you were a troll, though your memory is probably more sensitive than mine in this area. The way things are going, any nematode in your local pond has a more sensitive memory than yours truly. I do recall a few commenters claiming that your arguments about gold were tiresome, but that is a different animal altogether than trolling. Tiresome arguments are why God created the scroll wheel. But the future of gold is a very valid area for analysis and discussion on this blog, particularly as it may well be the only fungible asset that may maintain its value other than pitchforks. Regarding the nature of trolling itself, I am thinking about writing a post on the subject soon.

But I do want to respond to one aspect of your post, namely that TAE has an ethical mandate to post every opinion. The proper way to regard this blog as the hosts intended it is a virtual meeting in the living room of either I or S. The primary purpose is to allow people an understanding of what and why things are happening in the macroeconomic world, and what one can do to increase your odds against being overwhelmed by the total misery of the collapse. A secondary aspect, involving the comment page part, is to allow the readership to trade valuable information as well, and also to build a virtual community. As Stoneleigh frequently points out, a virtual community is no substitute for a physical, local community, but it gives people emotional support against the claims of the sheeple, who constitute most of their acquaintances, friends, and family, that they are nuts.

However, the TAE is one of a 1000 economic blogs, and if it chose to curtail comments of an opposing viewpoint, it in no way would be suppressing freedom of speech as there are 999 alternatives outlets. That the staff of TAE only does so rarely, even with some of the truly inane comments we all read, is partly a support of freedom of speech beyond the call of duty, but also the belief that inanity will out among this community if it doesn't turn into spamming. Cheryl is an example of this.

@Ash, Appreciated your article on China just now as many look to China for salvation. I have thought that the Chinese purchase of US treasuries is their way to support a market for their goods? Then I read that China is selling their stash of Treauries. If so there is a " sea change ".

@Sharkbabe - There really aren't any easy answers. Mostly I still have questions too. Such as when the financial bubble bursts, does that indicate that the flow of money stops completely and there won't be anything to pay people for jobs nor pensions? Or will the government mandate everyone only get a fractional amount? And would that amount be electronic format? Maybe if we knew what was going to happen in the next few years, it would be an easier decision.

Do you have another link or could you give me the title of the page to look for?**********Sorry I should have tried the link first-i had it BM'd and it was readable last time i used it-I run into this problem all the time-our honest Government/GS North-trying to cover/hide their trail-

Carney is a sneaky psychopathic sob and his 2 monkey bum boys-Steve and Jim are only too happy to accommodate-

So we'll have to go here for the numbers*********CMHC Insurance Policies in Force Limit

CMHC’s insurance-in-force limit is $600 billion, As of December 31, 2010, the actual amount of mortgages insured by CMHC was approximately $514 billion.

http://www.cmhc-schl.gc.ca/en/corp/nero/jufa/jufa_006.cfm************Go to page 46 and 52 of this mind numbing PDF-

As far as I remember, the last TIC (treasury international capital) report showed that China had increased their holdings of US public debt, despite (or because of?) their consistent remarks of distaste with the US sovereign debt situation, which essentially is a means of exerting geopolitical pressure and influencing US policy. The only somewhat credible thing I have heard about China selling Treasuries was in AEP's Telegraph article, which stated that a Li Daokui, the monetary policy committee member, had "let it slip" that China would begin "liquidating" its US debt reserves once the market "stabilizes" and it is "safe" for them to do so. Frankly, that still sounds like a bunch of nonsense to me. I mean, how much more stable and profitable can the Treasury market get? And when will it ever be safe for China to undermine the one market keeping the American consumers and businesses, its biggest customers, on an artificial respirator?

What makes even less sense is that he said the money gained from liquidation will be used to invest in US companies. That may be their long-term vision, but it simply cannot happen any time soon. AEP makes the real important point in that article when he says this:

"Fair enough, but let us be clear: the reason China has accumulated the equivalent of 6pc of global GDP in reserves (like the US in the 1920s) is because it has held down its currency to gain market share. As Michael Pettis from Beijing University points out tirelessly, the mercantilist policy hollows out US industries and forces America to choose between debt bubbles or unemployment – or, of course, protectionism, though we are not there yet.

Until it abandons that core policy, it has to keep buying foreign assets and lots of dollars. The euro can absorb only so much – 800bn euros so far – before Europeans realize (the French already realize) that Chinese bond purchases are double edged, and the yen the Swissie can't absorb anything at all. (The governments are intervening to stop it). Besides, China has the same misgivings about euro debt as it does about dollar debt. Perhaps more so after Euroland's long-running soap opera."

I don't recall any other commenters claiming that you were a troll, though your memory is probably more sensitive than mine in this area.****eg-Thanks for your comments on this and yes i suppose being the recipient of the "troll" insinuations-I suppose i am more sensitive to it-

I would also like to say i agree with 99% of what I&S say-Gold is a disagreement but that's all it is-I have also donated to this site and I certainly don't think people here are foolish by setting up their "bugout" ranches-

No advice as to what you should do at 58, but I bugged out at 55 and since then have rebuilt a farmhouse sold it moved to an island built a house and 2 acre orchard and garden (hammer and saw in MY hand) built a small sailboat. Sold house after a couple of years because I felt more advantages in a small town than on an island and have upgraded our present home to have 3 greenhouses a 40by16 ft shop with another greenhouse in the works that I hope to heat using the energy from a small river. You say you think you are too young to quit work? Never too young IMLOLO.

BTW if 'they' steal my nestegg I also have egg laying poultry to go along with a garden that supplies most of our familys fruit and vegetables.

Has anyone else noticed that the tensions between Israel, Palestine, Egypt and Jordan have begun to really flare up soon after 5%+ of the Israeli population turned out to protest the policies of its own government? This mass demonstration was after a 50-day string of earlier protests that originated in Tel Aviv, on "Rothschild Boulevard", no less. There is obviously A LOT of real tension existing between those "states", but when 5% of the US population turns out to demonstrate against the US government, I would fully expect the latter to serve up a plethora of "distractions" for the people.

Even before the attack (which I don't think was a simple troll attack), I was recommending that people write their comments into a WP and save it to their HD before posting. I don't want to even think about how many comments I lost to the bloggermonster before I started to do that.

@sharkbaby

Scrufulous offers very good advice. In addition to the doomstead approach, I would make the following comments:

If you are primarily relying on your federal pension for cash flow after your retirement, and if the job is not too obnoxious, you might consider staying on until the bitter end (which may be sooner than you think), saving most of that income, and putting it in a alternative place of savings like Franklins, treasury bills, precious metals, or pitchforks. If you have enough land for a personal garden, that might be a worthy effort as well.

The Federal government is going to start culling its "obligations" in the very near future as the collapse starts. The "Debt Kabuki" in Congress was a diversion really about setting up the politburo Gang of 13, and their first job will be to gut SS and Medicare. Medicare is based on fraud anyway even beyond the fraud of Usanistani medicine in general. It should cost about 25% of the money it is sucking up. Treasuries are almost surely going to be the last culled. First will be social security and Medicare. Obama is committed to destroying it as a Wall Street puppet. Ironically, it is easier for a Democrat to do it than a Republican which is why he is currently the TOTUS (Teleprompter of the United States). Also will be FDIC, Fanny and Freddy, federal pensions civilian and military (civilian will be cut first, obviously). FDIC will probably be put on a very limited monthly withdrawal rather than the guillotine. as in Argentina in 2001, and they may only pay out in yuan :-)

Thanks for the compliment but I gave no advice only related my experiences.

As far as your appellation, or would I say calumny, 'doomstead', no that is not what I am working at. I would rather call it an 'alternate reality'.I sat on a highway inter-pass one day in the 80's and imagined that all over the world at that moment the madness I was viewing was going on. I did not like that reality and decided to seek another. I now can walk outside into my garden and can see no reason to go flying down the road or flying through the air, it is enough. (of course if you were to suggest I come to Mexico for a visit and to share a cerveza I surely would not reject such an offer out of hand:)

Well, I don't regard "doomstead" as calumny and don't use the term in a pejorative sense. I am very pro doomstead. I just like to take the stupid words that the MSM propagandizes us with and turm them on their heads.

As to a beer - any time. I am partial to Pacifico Ballena Claro and buy it in 1.2 liter bottles. Always have a few in the fridge for emergencies.

BTW: O/T We went to the Reno Air Races thursday and the P-51 that crashed Friday hit within a few feet from where we were sitting. Count so far pilot and three spectators dead, many injured, some critical. Just another example that you never know what might happen to change everything. Therein are the best laid plans of mice and men.

QuoteSpeculation over the state of relations between Washington and Riyadh were stirred again this week when the former Saudi ambassador to Washington, Prince Turki al-Faisal, wrote a blistering New York Times opinion piece.

He warned that if Washington carried out its threat to use its veto to halt the Palestinian drive for statehood recognition in the UN Security Council, it would put at risk Saudi-US cooperation in numerous areas.

"The 'special relationship' between Saudi Arabia and the United States would increasingly be seen as toxic by the vast majority of Arabs and Muslims, who demand justice for the Palestinian people," Prince Turki wrote.

In the commentary headlined "Veto a State, Lose an Ally," he warned that Saudi cooperation with the United States in Iraq, Afghanistan, Yemen and the Gulf could also be at risk.

In case you were wondering, the reactors at Fukushima are still trying to melt further- and a LOT of water -12 tons/hour for reactor 3 is still being pumped in. And they're still not really telling us what's happening to the water - but we do know - for undenied fact- that the bottoms of the reactors are cracked and leaking. Still.

The US is literally in the business of creating tensions in the ME, as they provide the MIC with opportunities to intervene with force, grab strategic resources and churn profits in every way imaginable, including via the drug trade. A "two-state solution" just isn't in their vocabulary. US "allies", such as SA, or even China, can complain about the US approach all they want, but they can never do anything about it, because they are just as dependent on that underlying profit model as the US is. Now, the people, on the other hand, can and have been speaking and/or acting up in that region against the US-Israel model, including the Israeli people. So in that sense, I agree, the US and Israel have been and continue to play with fire in a manner that assures they will get severely burned sooner or later, but preferably sooner.

The next three theaters in the Long War are Syria, Iran, and Pakistan. The deep government wants to take out Syria before Iran for strategic reasons. Pakistan is "complicated" by their nuclear arsenal. Moslems with nukes - the horror! It looked like Turkey was going to start a proxy war invasion into Syria, but the problems with Israel make this seem less likely. But I see Syria as the next target in the Long War. How many members of congress, no matter how "liberal" or the NDP came out against the last operation in Libya despite the fact that it was illegal, violated the UN charter, and enlisted officially "terrorist" al Qaeda factions as its primary fighting asset? Pretty much a public announcement that al Qaeda was a CIA asset, though none in the MSM media or even the alternative media seemed to notice. As I recall, Ms. May, the single Green in Canada, came out against it. And Canadian war planes were very active in killing civilians.

And listen to the alternate "progressive" media such as Amy Goodman of Democracy Now! She never mentions how these Gandhian Syrian peaceful protesters killed 1000 Syrian solders and 200 policemen this year. Must have smothered them with love. Amy, why don't you show the public how your toast is buttered. Of course she is not the brightest bulb in the pack either.

I think Turkey is on the CIA list of those nations that they would like to break apart.

The way to do this is find a group that they can use.

Who are the alternatives

Kurds and the Armenian's and maybe a few other groups that I don't know of.

Kurds are large in numbers but they are not organized.Than you heave the Armenian's.So far the American influence is not working on the Armenian's and I am sure they are trying.

Unless they are able to have a regime change than their only alternative is to accept Armenian terms in the way the geopolitics of that region will be n the future.

This would be to have some kind of a coordinated effort with countries like Russia ,America and Armenia being involved.I know that sounds far fetched but I think the USA is getting impatient with Turkey and running out of alternatives

How many members of congress, no matter how "liberal" or the NDP came out against the last operation in Libya despite the fact that it was illegal, violated the UN charter, and enlisted officially "terrorist" al Qaeda factions as its primary fighting asset?

****************

What the FBI uncovered was a massive and highly focused campaign referred to by the Israelis as “perception management,” but which the CIA would refer to as a covert action. Much of the activity was illegal or incompatible with the role of foreign diplomats in the United States, which is why Leibowitz took action after his supervisors refused to proceed with prosecution. The focus was on Iran, with Israeli officials intent on preparing the American public for war against the mullahs. They were spreading disinformation on Iran’s nuclear program,

California First National Bank sounds great. Only problem is that once you have opened your account with td.gov, to add a new bank, you must present the documents in person to a branch manager with solid photo ID, a passport is preferable, and get it signed and notarized by the branch notary. This is to prevent fraud by a hacker stealing your passwords and cleaning out your account into a bank of their own choosing.

Of the three you listed, I think Wells Fargo is the strongest. And if their mortgage fraud proves unprofitable, they are still making a nice profit laundering Mexican drug money by the billions. But they can close you out without notice. I had an account with JPMC for 14 years and they closed me out. Told the credit agencies that it was at customer request. Wouldn't give me any reason. Since my credit was pure as Snow White (before she got it on with Sleazy - the eighth dwarf), they obviously weren't making enough money on me. I was a deadbeat - i.e. not maxed out at 30% interest. I actually used their own system to automatically pay off my credit card every month from my checking account, so never paid any interest or penalties. They consider that a felony.

Thanks for the offer, I would bring a local 'Pacifico' from a small micro here. We can arm twist about a couple of things from your last post about Syria. I think that the only reason for buggering about in Syria for US/Nato would be to be on the winning side. Syria has been quite useful as a spoiler up to now so, though I could very well be talking through my hat, if Bashar al-Assad is able to keep a firm grip I do not see a need to mess about there.

I do like Amy Goodman though, the way she repeats 'Democracy now', 'Democracy.org' it sounds so poetic, so omapatapeia like, Sound echoing sense, even if it isn't. but then again could it be? ? God, I do get so confused!

EG Thanks for your link to the Hudson interview on Guns & Butter. I liked hischaracterization of the politico-financial situation in the US as "class warfare with an iron fist."

Interesting chart in most recent Elliott Wave Theorist shows that during 1913-2011 period gold increased 400% more than the CPI. A factoid that supports some of their earlier gold analyses suggesting $500/oz as a reasonable reentry level during/after the great shakeout.

Hello all, another faithful reader here, never commented before, grateful to have an opportunity to comment – if I can figure out how to register…

There’s an issue I’ve been mulling over a while, wonder if anyone has any thoughts – Scandia, you’re the only one I’ve identified so far who may share my general situation, I’m a single geezette stuck in a city. West coast US.

I had a very useful conversation w/Stoneleigh when she was here a few months ago, she advised that I use the $$ I’m preserving to rent a place near my community when I have to leave this little condo (condo assn. failure, too high prop taxes or no longer safe) – my income is SS & a pension and if per El G’s posting it’s going to disappear sooner rather than later – (I’ve been hoping for another year of this income:( - I can’t imagine that what I’ll have saved is going to last long renting in the city. Perhaps when things progress far enuf that SS etc are gone my $$ will go a lot further than now. Seems like it might be tricky timing the need for a place w/deflation appreciating the value of my cash.

I’m also trying to figure out – I emptied my credit union mostly of savings some time ago but my income still goes there in automatic deposits – My latest tack is to pay my bills immediately rather than wait for due-dates so I can pull the rest of the cash out on a moment’s notice – surely I’m not the only one in this situation – what are others doing re this? Not crazy about the idea of having my checks sent to me thru the mails or having to pay bills, what, via money orders? Guess I’m too damned spoiled/used to comfort & ease – perhaps it’s going to happen fast enough that there will be no checks to worry about – just trying to figure out a “plan” as much as possible.

Thanks for any thoughts – and for a year’s worth of heartening and informative comments. :)

I am not saying that either Gaddafi or Bashir Asad are going to be sitting at Jesus' right hand after the second coming. I will say that the people in Syria will not get a better deal under the NATO asset strippers (think Iraq) and the Libyans are going to get a much, much worse deal under al Qaeda rule. Libya had the highest standard of living in Africa, near zero unemployment, and great hospitals and public health systems for an African country. And then there was the amazing great artificial river supplying the north with water. Not only did NATO bomb this, but they bombed the factory making the giant pipes for it. The Libyans are phucked. Welcome to the NWO, courtesy of the UN and NATO.

The Chinese and Russians are not stupid. They knew that the No Fly Zone meant total war when they didn't veto it. They each must of gotten something useful in return. Or the US gave them an offer they couldn't refuse. Medvedyev in particular is a NWO tool. Be interesting to see how Putin deals with him.

El G - You seem to have it all wrapped up nicely. Problem is your "theory of everything" leaves out the fact that humanity evolves.

IMO condemning all of humanity based on past experience is puerile and simplistic. Not up to your standards.

We have allowed ourselves, our societal structure, how we as a species on this planet interact to be structured in such a way as to ensure the worst possible behavioral response and therefore the worst ultimate outcome.

It's really as simple as that.

To then state that there is no possible alternative to this structure is asinine. It would be simple to identify the problem, which many including those here and all over the nets have already done, then institute an alternative.

Yea,it's not that simple...I forgot...fucket lets just spend our remaining time analyzing all of the BS symptoms of collapse ad nauseam, count our $ and PMs, and tend our gardens.

Part of my point is that there is no preparation for what is coming down. I say this as probably one of the most preped people you will ever meet. I have everything. Perhaps thats why I can then step back and see how futile prepping is when the other 99.999% of the population is not.

Interesting chart in most recent Elliott Wave Theorist shows that during 1913-2011 period gold increased 400% more than the CPI. A factoid that supports some of their earlier gold analyses suggesting $500/oz as a reasonable reentry level during/after the great shakeout.

************That's pretty laughable-a deflationist comparing CPI- With all the consumer price eliminations over those years-such as food and oil and especially housing-Try adding in the last 20 year surge in house prices alone (a consumer expense)instead of the new OER (owners equivalent rent)that's used in its place-

Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.

http://www.bls.gov/cpi/cpifact6.htm

You see-Gold has done nothing-it just sits there-your paper dollars are devaluing to the tune of 98% since 1913 and CPI does not adjust for inflation//devaluation-Gold does-Good luck trying to buy gold at $500-

Perhaps thats why I can then step back and see how futile prepping is when the other 99.999% of the population is not.

Yes, "long-term" progress will only be achieved when/if human nature evolves past greed and sloth. Until then, the best we can hope for is a predictable cyclicality. We are only noble in the abstract; up close and personal highly flawed and individually capable of extreme good and evil.

After that rude, yet minor interruption, we're baaack and I wanted to respond to your question.

"What exactly about that article makes you want to blow your brains out?"

...with a question. How many works/interviews by respected and knowledgeable peak oil theorists, such as Stoneleigh, Chris Martenson, the people at The Oil Drum, Post Carbon Institute, FEASTA, Kunstlerc, etc. have you watched or listened to?

If your answer is none, then I would be happy to point you in the right direction with links. After considering the ideas of these people re: peak oil, I imagine you will understand exactly why the WSJ article is painful to read for me. For example, one fundamental flaw is that he only considers the price of energy in determining whether various energy projects will occur, instead of the much more important concept of EROEI (energy return on energy invested). If it takes you a barrel of oil to get a barrel of oil out, then the project will not be pursued further, regardless of what market prices are doing. Simple concept, but still seems to elude many of the mainstream energy pundits out there.

"In the grand ol' tradition of "Libertarian reluctantly calls fire department," all and sundry are having fun with the news that Ayn Rand received Social Security and (apparently) Medicare in her dotage."

That's a beaut. Actually Rand's argument that she was only taking back money that was coerced from her has a certain superficial logical merit. But to have real merit, she would have had to figure out what was the total sum she paid in (easy enough - SS sends you the total by year every year), and an honest portion she would have used for consumption and what for investment, figured out a realistic return on investment, and then refused a penny more. With her lung cancer final years, I bet she was a bit over drawn :-)

IMO Rand was morally challenged more than most of us. And her literary skill leaves a bit to be desired. She was also quite the mooch, even after she was raking in the bucks on her novels. But in the end, anyone who subscribes to her "greed is good" social Darwinism (which has nothing to do with Darwin) ideology is responsible for their own turpitude. The best that can be said for her is that she did not continue to write and publish after her death as did L. Ron Hubbard.

I like the platform of the German Pirate Party, but according to the Wikipedia article, they don't have a position on Euro debt and the banks as of yet. Though when they do issue one, I tend to expect it to be compatible with my own. Also, the German Social Democrats are even worse than Merkel when it comes to giving up national sovereignty. I am not sure where the Greens and the Left stand. In Hudson's interview (he was in Germany at the time), he said that Merkel was way to the "right" of the German electorate on most social issues. Once again, I recommend that G&B interview. He claims that the Common Market was set up by well meaning populists in the 50's and 60's, but was commandeered by the elite banksters in the 80's. While the more enlightened politicians of their day were well intentioned, I tend to believe that even back then they were being suckered by the banksters.

Ash said: "How many works/interviews by respected and knowledgeable peak oil theorists, such as Stoneleigh, Chris Martenson, the people at The Oil Drum, Post Carbon Institute, FEASTA, Kunstlerc, etc. have you watched or listened to?"

That was addressed to someone else, but I can't resist. Answer (for me): many. Many. Too many. 12+ years' worth, back to the inception of the energyresources group in the late 1990s. And it has been most educational. But there's also a lot that the peak oil crowd doesn't get. This is (as ever!) much too big of a subject to effectively mount on this (flaky) blogger platform. But, here's a very modest start -- on the oildrum discussion of the Yergin item in question:

Thank you for pointing me towards that discussion thread. I think it critical to distinguish between peak oil theorists who have varying estimates on the timing and severity of its effects, and Yergin, who clearly has no idea what he's talking about, thanks in no small part to his neoclassical economic perspective. This is what one of the "Yergin defenders" said in that thread:

People like Yergin have a track record of one hundred years of being right to back them up.

No doubt they will be proven wrong-eventually, maybe even this decade, I am not disputing this possibility-this likelihood, actually.

But I have read The Prize, and I can say this about Yergin;he is a very fine wrier, with a great sense of history."

http://www.theoildrum.com/node/8386#comment-837457

It takes more than elegant words and a "sense of history" to make an informed argument about the imminent importance of peak oil. Yergin's reliance on neoclassical doctrine leads him to assume that market forces will have to opposite effect on alternative energy projects than what they most likely will have, especially in a global financial depression more severe than the GD.

I have to step away for a bit, but we should continue this discussion later.

While on the subject, here's a site that should be thoroughly digested by all peakers. Not because everything said here is correct -- certainly not! -- but because scores of worthwhile and provocative points are made, quality arguments are constructed, links to informative materials are given, etc., etc. Great skeptical thought stimulation! A ton of fun: peak oil debunked

It is essential to read things that you strongly disagree with. The alternative is to unwittingly slip into a massive black hole of confirmation bias.